Modes of Investing in Gold: Understanding Returns, Liquidity and Taxation

 

Modes of Investing in Gold: Understanding Returns, Liquidity and Taxation

Gold continues to play a crucial role in Indian investment portfolios, acting as a hedge against inflation and market volatility. While investors today have multiple ways to invest in gold—Physical Gold, Sovereign Gold Bonds (SGBs), Gold ETFs, and Gold ETF Fund of Funds (FoFs)—each option differs significantly in terms of liquidity and taxation, which directly impacts net returns.

Physical Gold

Physical gold, such as jewellery, coins, and bars, remains the most traditional form of investment with no upper investment limit. However, it involves concerns around storage, insurance, and purity, which depends on the jeweller.

Liquidity:

Physical gold is relatively liquid, but investors may face price cuts due to making charges, buy–sell spreads, and discounts at the time of sale.

Taxation:

If physical gold is sold within 24 months, gains are treated as short-term capital gains (STCG) and taxed as per the investor’s income tax slab.

If held for more than 24 months, gains qualify as long-term capital gains (LTCG) and are taxed at 12.5%.

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Sovereign Gold Bonds (SGBs)

SGBs are government-backed securities issued in grams of gold, offering assured purity of 99.5% and a fixed 2.5% annual interest. The minimum investment is 1 gram, with a maximum of 4 kg per individual per year.

Liquidity:

Although listed on stock exchanges, SGBs generally witness low trading volumes, making liquidity relatively limited compared to ETFs.

Taxation:

If SGBs are held till maturity (8 years), capital gains are completely tax-free.

However, the 2.5% annual interest is taxable every year as per the investor’s income tax slab.

If SGBs are sold on the exchange before maturity, gains are taxed like other gold investments—STCG as per slab rate (up to 12 months) and LTCG at 12.5% beyond 12 months.

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Gold Exchange Traded Funds (Gold ETFs)

Gold ETFs provide electronic exposure to high-purity gold and are traded on stock exchanges. A demat and trading account is mandatory, and pricing is transparent.

Liquidity:

Gold ETFs offer high liquidity, as they are actively traded during market hours.

Taxation:

If sold within 12 months, gains are treated as short-term and taxed as per the income tax slab.

If held for more than 12 months, gains qualify as long-term and are taxed at 12.5%.

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Gold ETF Fund of Funds (FoFs)

Gold FoFs invest in underlying Gold ETFs and are available in mutual fund format. Investors do not need a demat account and can invest through SIPs or lump sum via the AMC.

Liquidity:

Liquidity is good, as units can be redeemed directly with the mutual fund at applicable NAV.

Taxation:

If redeemed within 24 months, gains are taxed as short-term based on the investor’s slab rate.

If held for more than 24 months, gains are taxed as long-term capital gains at 12.5%.

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Key Takeaway for Investors

While physical gold offers emotional and traditional value, financial instruments like SGBs, Gold ETFs, and Gold FoFs provide better transparency, safety, and tax efficiency. Understanding holding period–based taxation is essential, as it can significantly impact post-tax returns.

The above information is for illustration purposes only. Tax laws are subject to change. 

Disclaimer: Mutual Fund investments are subject to market risks. Past performance is not indicative of future returns. Please read all scheme related documents carefully before investing.