Gold ETF or Gold bond?

By Morningstar |  04-03-21 | 

When you look at the allocation of gold in your portfolio, you must take into account Gold Exchange Traded Funds (Gold ETFs), gold funds, physical gold (bars, ingots, coins) and Sovereign Gold Bonds (SGBs).

Jewellery is not viewed as an investment because the sentimental value takes precedent and it is considered for sale only in dire circumstances. Moreover, GST is levied on making charges.

SGBs and Gold ETFs, are a low-cost way of taking exposure to gold. Investors do not have to incur making/wastage charges, storage charges (bank locker) or insurance cost. And your investment is backed by gold of 999 purity.

The tax aspect

STCG: If you sell in less than 36 months, you generate short-term capital gains. These gains are taxed at the income tax slab rates applicable to you. Same for Gold ETF and SGB.

LTCG: If you sell after holding for 36 months, you generate long-term capital gains. These gains are taxed at 20% (plus any cess) with indexation. Same for Gold ETF and SGB.

When LTCG is exempt for SGB: The LTCG generated when you redeem between 5 and 8 years is tax-free – completely exempt from tax.

Interest income for SGB: This 2.5% is taxable as per the tax rate applicable for your income slabs. The interest income is added to your total income under the head of “Income from Other Sources” and taxed as per tax slab rate accordingly. For those the in 10%, 20%, and 30% tax brackets, the pre-tax 2.5% return will be converted into post-tax returns of 2.25%, 2% and 1.75%, respectively.

Which is better suited for you?

  • Short term: Gold ETF

If you are planning to use gold tactically, to buy at dips and sell during rallies, then liquidity is a prime concern. In that case, Gold ETF is better. Also, for a short-term holding period, a Gold ETF is better. Because when it comes to SGBs, the volumes are poor on the stock exchanges. View it here.

  • Long term: SGB

The tenure of the SGB is 8 years from the date of issue. Should you need the money, there is an option for early exit after a lock-in period of 5 years. No redemptions are allowed before completion of the fifth year.

What do you do if you need the money before that? Within a fortnight of issuance, SGBs are tradeable on stock exchanges. So if you hold them in demat form, you do have the option of selling it in the secondary market.

Looking at the tax aspect, it is best to stick to the long term when you invest in SGBs.

  • Regular return: SGB

The SGB offers 2.5% p.a. interest that is paid semi-annually on the original investment value. Let’s say you bought a bond at the rate of Rs 4,400. Even if the price has risen to Rs 5,100, the interest is still paid on Rs 4,400. Alternatively, if the price decreased to Rs 4,000, you still get 2.5% of Rs 4,400. That does not change.

The SGB will work best for individuals in the lower tax bracket who need a regular payout.

Alternatively, maybe a combination of both will be apt.

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