The Union Budget 2021-22 was presented on Monday, the 1st of February 2021 by Nirmala Sitharaman, the Union Finance Minister. This year’s budget was expected to address the various financial woes resulting from the onset of the COVID-19 pandemic. However, there were no major changes in the way individuals are taxed.
The stock markets have reacted positively to the budget amendments as there are no uncertainties and no significant policy changes made. In fact, the BSE Sensex regained its 50,000 levels this week. A considerable modification from the individual’s point of view is that the senior citizens aged 75 years and above are not required to file ITR if their income sources are pension and interest. The paying bank will deduct taxes.
Gold prices are on the bull run since the COVID-19 pandemic took over the world as investors preferred to preserve their capital amidst market volatility. Gold prices touched their fresh peaks and made the yellow metal unaffordable for most individuals. Previously, the customs duty on gold was 12.5%.
The Finance Minister proposed to reduce the customs duty to 7.5% in her budget speech on Monday. Furthermore, the Finance Minister also proposed to levy farm cess, which translates into reducing the customs duty on gold to 2.5% points. This means you can purchase gold at a lower price.
Now, the question is – should you purchase gold jewellery for the sake of investing in gold? The answer is simply no! It is never advisable for anyone to ‘invest’ in gold jewellery. You may purchase gold jewellery for consumption but not as an investment. As you might already know, gold jewellery comes with additional costs.
When you buy a piece of gold jewellery, you will be levied with making and wastage charges by the maker. These charges have made gold jewellery unattractive as an investment. These are a one-time cost borne at the time of purchase, and you will not be able to get this amount while you are selling your jewellery.
Therefore, you may not consider gold jewellery as a viable option to invest in gold due to reduced customs duty. Instead, you may consider other ways of investing in gold. The following are the better ways of investing in gold as compared to purchasing gold jewellery:
i) Gold ETF
A gold exchange-traded fund or gold ETF is an open-ended mutual fund whose price is tied to gold’s prevailing price in the market. Gold ETFs are also referred to as paper gold. One unit of a gold ETF is equivalent to one gram of purest gold. The reduction in customs duty has resulted in the reduction of the cost of units of gold ETFs. To add to that, gold ETFs don’t come with any making or wastage charges, making them a better option than gold jewellery.
The budget amendments also proposed setting up of spot gold exchange, for which the Securities and Exchange Board of India (SEBI) would be the regulator. A gold exchange was needed for a long time as some of the key market players are being underserved by the existing market infrastructure. Having a gold exchange helps make the whole process transparent, and offers the twin benefits in the form of more efficient price discovery and adding to the liquidity pool.
ii) Sovereign gold bonds
Sovereign gold bonds (SGBs) are issued by the Reserve Bank of India (RBI). The price you can purchase and redeem these bonds is tied to the prevailing gold price in the market. You will also get an annual interest at the rate of 2.5%, making SGBs an excellent investment option.
The capital gains earned on selling physical gold is taxable in your hands. On the other hand, if you hold SGBs until their maturity, you won’t incur any tax on capital gains. However, you can prematurely sell your SGBs in the secondary markets. In such cases, capital gains become taxable.
A major advantage of investing in SGBs is that you don’t get to hold gold physically, which alleviates the risk of theft and cost incurred towards securing gold. Therefore, investing in SGBs is a far better option than purchasing physical gold. The issuance of the next tranche of SGBs (Series XI) will be made on the 9th of February. If you have not subscribed yet, then you have a chance to do so until the 5th of February.
iii) Gold mutual funds
Gold mutual funds are a class of equity funds that invest in directly or indirectly in gold reserves. These funds invest in companies involved in gold production, mining and distribution. Most gold funds are open-ended. Since the underlying instrument in these funds is gold, the cost of fund units of gold funds is directly tied to the market’s gold price.
iv) Gold bars and coins
If you like to hold physical gold, you may consider purchasing gold bars or coins instead of gold jewellery. Although the making and wastage charges are not non-existent, their extent of levying on gold bars and coins is negligible compared to jewellery and ornaments.
However, you may have to incur a cost to preserve them securely as banks charge a considerable annual maintenance fee for their safety lockers. In case you want to avoid holding physical gold and save yourself from incurring making and wastage charges, you have to invest in gold ETFs, gold mutual funds or SGBs.
How much should you invest in gold?
Gold is traditionally considered as a hedge against market volatility and inflation as its prices don’t fluctuate significantly over a short period of time. Most financial advisors and planners recommend constituting up to 15% of your portfolio with gold. However, if you are keen on capitalising on the wealth creation opportunities that gold may throw up over time, you may consider increasing your exposure to gold.
Conclusion
The Union Budget 2021-22 gave a pleasant surprise to investors. The customs duty on gold has been reduced from 12.5% to 7.5%, and with the levying of the newly introduced farm cess, the net reduction in the customs duty on gold is 2.5 percentage points. However, you may not consider investing in physical gold as an ‘investment’. Instead, you may invest in gold ETFs, mutual funds, and SGBs as they are more cost-effective than gold jewellery. In case you like to hold gold physically, you may consider gold bars and coins as they come with much lower making and wastage charges.
For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in
Engineer by qualification, financial writer by choice. I am always open to learning new things.
