Why Consider Gold as an Investment?

Gold has always held a significant place in Indian culture and traditions for centuries. But today, gold has also emerged as a popular investment avenue in India. The country has a long-standing affinity for this precious metal and it plays a crucial role in the country's economic landscape.

While gold has always been an investment choice for the elderly, the new age methods to invest in gold also made it a popular investment choice among millennials. Let’s explore the reasons why considering gold as an investment in India is a prudent choice, the different ways to invest in gold and tax implications on buying gold.

Why You Should Invest in Gold?

If you are searching for reasons to invest in this precious metal, then here are a few of them:

1) Historical Stability

Gold has always proven to be a reliable store of value over the years. Gold’s value has withstood economic downturns while also being a hedge against inflation. This makes it a safe haven during times of crisis.

2) Diversification

Gold as an investment serves as a diversification tool for investors. By including gold in your portfolio, you can mitigate risks like extreme market volatility. Gold prices are not expected to be much volatile and therefore, are ideally suited for risk-averse investors.

3) Hedging Against Inflation

Gold has historically acted as a hedge against inflation. When inflation rises, the value of paper currency tends to decline but gold often retains its value. Further, it has been successful in delivering returns higher than the inflation rate thus making it a suitable hedge.

4) Cultural Significance

In India, gold is not considered just an investment but a symbol of wealth and prosperity. Gold jewellery is an integral part of Indian weddings and festivals. Further, the festival season in India witnesses a significant surge in gold demand, especially during Diwali.

5) Global Acceptance

Gold is a universally accepted form of asset. You can easily convert gold into cash anywhere in the world. This provides much liquidity and global mobility to investors.

How to Invest in Gold?

Gone are the days when you needed to visit your jeweller to invest in gold. With the advent of technology, multiple gold investment options have emerged. Here are the different ways on how to invest in gold in India today:

1) Physical Gold

Physical gold investment is basically holding gold in tangible form. You can buy gold jewellery and ornaments that will also be helpful on occasions and festivals. Alternatively, you can invest in gold coins and bars if you are buying with the sole purpose of investment. One of the major drawbacks of physical gold investment is that it proves to be costlier due to making, designing and labour charges. Also, there is a risk of theft due to which you might end up paying bank locker charges as well.

2) Digital Gold

There are investment platforms that allow digital gold investment. When you invest your money in digital gold, the investment company buys an equivalent amount of gold on your behalf and stores it in secure vaults. The gold is insured by the insurance companies thereby saving you all the hassle of going to your jeweller or from the risk of theft and other charges.

3) Gold Funds

Also known as gold mutual funds, it’s a gold investment plan that pool money from various investors and invest in various forms of gold. The fund tracks the prices of gold and offers the same gold investment returns.

4) Gold ETFs (Exchange-Traded Funds)

It's akin to stock market investment but for gold. Gold ETFs trade on stock exchanges that provide you an opportunity to buy and sell gold, just like stocks.

5) Gold Monetization Scheme

GOI introduced the Gold Monetization Scheme in 2015 whereby you can deposit physical gold with Bank and earn interest. The gold can be in any form, bars, coin or jewellery.

When a customer brings in gold (jewellery) to the bank, it will first be tested for purity and after the consent of the customer, it will be melted. A certificate by the collection centre will be given stating the amount and purity of gold which will have to be produced in the bank for opening the gold deposit account. The quantity of gold will be credited into the customer's account.

The interest earned on it will be exempt from income tax as well as capital gains tax.

The minimum quantity of deposits is pegged at 10 grams to encourage even small deposits.  The Interest is paid in INR. The Customer may redeem in cash or gold as per his choice.

6) Sovereign Gold Bonds (SGBs)

A sovereign gold bond (SGB) is a government security that is denominated in gold grams. It is a substitute for physical gold. Investors invest in these bonds when the scheme opens and it is redeemed on maturity. RBI on behalf of the GoI manages the sovereign gold bond scheme. Bank of Baroda offers customers the opportunity to invest in the sovereign gold bond scheme through all of its branches in the country.

Benefits of Investing in SGB :

1) Min. subscription -1g; Max. Subscription-Individual-4Kg, HUF-4Kg and Trusts-20Kg.

Available in both DEMAT & paper form. DEMAT subscriptions can be easily traded on Stock exchange.

3) Investors are assured of the market value of gold at the time of maturity and periodical interest.

4) SGB is free from issues like making charges and purity in the case of gold in jewellery form.

5) Can be used as a collateral security for availing Loan

6) Freely transferrable

The lock-in period of the bond is 8 years, customer becomes eligible for early redemption after completion of 5 years. Customer can apply for redemption only when RBI comes up with the redemption window for the specific tranche which is around the interest due date.

Earns interest @ 2.5% payable half yearly to the holder of SGB unlike physical gold.

Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961).

The capital gains tax arising on redemption of SGB to an individual has been exempted.

Tax Benefits on Gold Investments

Another reason as to why invest in gold is taxes. The government also promotes gold as an investment and thus, offers multiple tax benefits on gold investments. These include:

• Long-Term Capital Gains (LTCG) Tax Exemption: If you hold gold for more than 3 years, gains from selling your gold investments are exempt from LTCG tax up to Rs. 1 lakh. Further, capital gains on sovereign gold bonds and gold monetization schemes are exempted.
• Indexation Benefit: You can benefit from indexation to adjust the purchase price for inflation. This directly reduces your capital gains tax.
• 80C Deduction: Investing in Sovereign Gold Bonds provides you a deduction of up to Rs. 1.50 lakhs for each financial year.
• Exempt Interest: Interest on the gold monetization scheme is exempted from tax.

Conclusion

Investing in gold in India is not just a financial decision; it's deeply rooted in cultural sentiments. With various investment avenues available from physical gold to digital options, you can choose the method that aligns with your financial goals. Gold's historical stability, diversification benefits and the ability to hedge against inflation make it an attractive investment option. For more such useful information, visit Bank of Baroda.