How to buy gold in the most tax-efficient way



Apr 19, 2023

🤩 Gold continues to be Au-some. Prices have skyrocketed recently. But, as with any profit - returns or otherwise - there comes that other thing that we have to factor in. No points for guessing that it’s taxes. Yes, we do have to pay our dues on whatever gains we make on gold, but there are ways to plan your investments to be most tax efficient. There are catches, of course. We’re breaking everything down for you.

Gold is one of the most sought-after commodities in India. It has been used for centuries as a store of value, a symbol of wealth and prosperity, security in emergency situations, and a hedge against inflation (meaning when inflation is high, gold prices tend to go up). Over the last decade, gold has returned a little over 7% in annualised returns.

There are multiple ways to buy gold. There’s the physical gold route, of course (like jewellery), and then there’s gold funds (ETFs and mutual funds), sovereign gold bonds issued by the Government, and digital gold.

(1) 🌟 Physical gold is great if you want to wear jewellery. Consumption of gold in India is mainly driven by jewellery, which accounts for 90% of the demand. Stuff to keep in mind while buying physical gold: there are making and storage costs associated (which means more money out of your pocket), gains are taxed at your slab rate if sold within 3 years, or 20% with an indexation benefit if held for more than 3 years. It’s also highly illiquid - if you need cash immediately, finding someone to buy your gold is quite the process. Psst there is also a 3% GST associated with physical gold when you buy it. Our take? Go with this route only if you like flaunting that bling. No other reason to indulge in physical gold.

(2) 💰 Gold funds - either mutual funds or ETFs - had the 20% indexation benefit before, but that suddenly went away from April 2023 onwards. Sigh. So, these are effectively taxed similar to debt funds - at your slab rate. So, what’s the benefit of these then? Well, no making or storage costs. No GST. Easy to buy and sell. The catch? Expense ratios are 0.1-1%, which means you have to pay an ongoing fee every year on the value of your gold funds. Our take? Indulge in this if you are looking for flexibility to get in and out of gold easily, while having the faith that your investments are regulated.

(3) 📱❇️ Digital gold: basically, if you want physical gold without the hassle of physically dealing with it, digital gold is your bff. Easy to buy and sell. No minimums. Although the maximums can differ from platform to platform (we’ve seen max of 2L allowed on certain platforms). These are taxed similar to physical gold because there is actual gold being stored in a vault with your name on it. Also, that 3% GST we talked about for physical gold? It’s applicable here too. Some providers may even charge 2-3% for storage and maintenance costs. Aaaand digital gold is not regulated which means there is no SEBI or RBI or anyone overseeing these providers to make sure they are not up to anything suspicious. Our take? The best way to own physical gold is through digital gold, assuming you are ok with the additional charges involved and the risk of this being unregulated. It’s easy to get started since you don’t need a demat account.

And finally.




These are sovereign gold bonds, which are issued by the government. A big major huge catch here is that there is a lock-in period of 5 years. Plus, you can’t buy these all year round - you need to wait for the windows opened by the Government to get in on the action. Selling SGBs is also really tough. Here’s the good stuff: you are completely exempt from capital gains tax if you hold these bonds till maturity - which is 8 years (you can sell after 5 years, but you don’t get the tax exemption in that case). OH AND, you get a 2.5% simple interest every year on your SGB investment. We love SGBs, assuming you are not trying to remove the cash anytime soon. Annual interest (not compounded, but we’ll take it), tax exempt at maturity, no charges like storage blah blah, no GST, and backed by the government! Sounds like our kind of thing. If you’re ok staying locked in, we say GO FOR GOLD via SGBs!

So, should you buy gold? Well, prices currently are high, so you may want to wait for them to cool down a bit - and if you’re going for SGBs, you have to wait for the window to open! It’s important to note that gold's performance during economic downturns has been better than equities and mutual funds. However, in the long term, gold's returns are lower than equities and mutual funds. As an investor, you should consider all these factors (including taxes!) before investing in gold.

💖Bling bling, we’re signing off.

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