The Hindu Business Line : More glitter in paper gold

Flaunting one’s jewellery is fraught with danger. Ask the chastened lady denizens of Chennai in particular who have displayed this hazardous proclivity that presents them as sitting ducks even to the greenhorn thief on the prowl.

In 1990, the then Finance Minister had to lug a huge quantity of gold in the RBI’s possession to London on a specially commissioned flight. But that was more to bolster international financing agencies’ sagging confidence in India whose forex reserves had dipped to an all-time low.

Be that as it may, the point is exposing gold is an invitation to disaster. Keeping them in household lockers is only marginally safer. Bank lockers don’t come cheap these days, especially when one considers the huge deposits demanded by the unctuous bank manager for dishing out this favour.

Yet, gold is not something that a serious investor can paper over, especially now that it has positioned itself as the best investment option recording impressive gains steadily and inexorably reflecting, among other things, its scarcity value.

Safer and less expensive alternatives have sprung on the horizon. Gold Exchange Traded Funds are like mutual funds’ units. Each unit of ETF may represent a gram of gold. This then is the true alternative to investing in gold sans its downside. One can cash out anytime realising the prevailing market price of gold without being bothered about the wiles and guiles of the neighbourhood goldsmith.

Gold ETF can be purchased from the comfort of one’s home from online brokerage houses. Being held in a dematerialised form, there are no storage and security problems. A gold biscuit would conform to a standard weight but a gold ETF lends itself to atomisation, as it were, what with it being available in multiples of one gram.

The second best alternative is to invest in shares of gold mining companies which is what DSP ML Gold Fund, for example, does. It is only second best because investing in shares of gold producing companies is not the same as investing in gold itself which is the case with a gold ETF.

The tax factor

Gold and gold products or for that matter any precious metals or stones are one of the six assets on the hit list of the Wealth-tax Act. Somehow paper assets have been lucky to duck and evade its sweep. In the event, a gold ETF as well as shares of gold producing companies are not liable to wealth tax.

Units of mutual funds investing in gold mining companies aren’t exigible to wealth tax either. While the threat of wealth-tax stares one in the eyes only if he is really wealthy — the tax-free threshold is Rs 15 lakh with the excess taxable net wealth being taxed at a soft 1 per cent — the income-tax benefits are bound to be found useful by the not-so-wealthy persons as well.

Capital gains from gold attract normal taxes. If they are sold before three years of their acquisition, the resultant gains are short-term in nature and attract the slab rates. But if sold after three years, they attract 20 per cent tax, period, of course with the indexing benefit that has the effect of jacking up the cost in tune with inflation.

Paper gold, however, is in the distinct company of shares and units that get the hallowed status of long-term capital assets just after 12 months of holding, attracting a tax of 10 per cent without indexing or 20 per cent with indexing. All in all paper gold emerges clear victor on all parameters.

Only those who are afraid of routing, or those who are unable to route, their investments through banking channels would fight shy of paper gold. Which is why villagers routinely convert their savings into gold and stash it into dingy lofts despite knowing full well the dangers ahead of such misadventure.

And which is why city slickers stash away their ill-gotten gold in bank lockers despite knowing full well that the income-tax sleuth could come calling.

(The author is a Delhi-based chartered accountant.)

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