A better way to bond with gold

Rajalakshmi Nirmal | Updated on January 20, 2018



Sovereign gold bonds are very attractive now as there is no capital gains tax on redemption

There’s now a tax-free way to earn gold returns. The Centre has made its pet scheme, the sovereign gold bond, exempt from capital gains tax at the time of redemption, in its recent Budget. Investments in gold in any other form — gold ETFs, gold funds, gold coins or jewellery — are subject to a capital gains tax of 20 per cent (with indexation benefit) after three years.

The sovereign gold bonds are not available on tap. They are usually offered for limited periods and the third tranche of gold bonds is opening on March 8, to close on March 14. Here, we look at the different options to invest in gold and pit the sovereign gold bonds against them.


When you buy gold from the physical market, you don’t buy it at market price. You cough up about 2-3 per cent extra for dye charges if it is a coin (or bar) and upward of 7-10 per cent on making charges in the case of a gold bangle or chain (if it is studded with precious stones, the making charge will be higher). Holding gold at home is unsafe, and renting a bank locker is expensive. Public sector banks charge about ₹1,500-2,000 for a small locker and upwards of ₹6,000 for an extra-large locker. But it is your responsibility to insure your jewellery against damage or loss while in the locker. At the time of selling physical gold, you suffer deductions for wastage and making charges. Plus, there is capital gains tax too. Capital gains on gold, when sold before three years, are taxed at the slab rate. If sold after three years, it will be taxed at 20 per cent (with indexation benefit), says Alok Agrawal, Partner, Deloitte Haskins & Sells LLP. Now that a PAN card is mandated for purchases above ₹2 lakh, the imposition of tax is likely to become more prevalent.


Investing in gold in paper form can save you the headache of safe-keeping it. In India, there are both gold ETFs (a mutual fund that invests in physical gold and lists units in stock exchanges) and gold funds (mutual funds that invest in these gold ETFs). Both these kinds of funds passively track the price of gold and fetch roughly the return on Indian gold prices. Gold ETFs can be bought and sold on the equity exchanges. Since it is traded on stock exchanges, you need to open a trading account and also a demat account.

However, do note that the price of ETF units depends on demand and supply factors. Many a time these units do trade at a discount to their NAV (net asset value). So, if you are selling your units at such a time, you may earn less than the actual gold returns. Gold funds are an option for those who don’t own a demat account. But you will have to cough up a fund management charge. On the taxation front, both are similar. If held for less than three years, capital gains are treated as short term and taxed at slab rates. ETFs and funds have to be held for three years for gains to be subject to long-term capital gains tax (20 per cent with indexation benefit).

Sovereign gold bond

Sovereign gold bonds, after the Budget tweaks, offer advantages both over physical gold and gold funds. For one, there is an interest payment in these bonds. An interest of 2.75 per cent per annum will be paid on your initial investment. So, even in years where gold prices drop, the interest income will prop up your returns to some extent. Two, since there is sovereign guarantee, repayment of the bond is risk-free. Three, there is now no tax on these bonds with respect to capital gains at the time of redemption. But do note that this capital gains tax exemption is given only if you hold it to maturity. On exit prior to maturity, capital gains will be taxed. Parizad Sirwalla, Partner and Head, Global Mobility Services at KPMG, says, “If the gold bond is sold within three years of investment, capital gains will be taxed at normal slab rates. If sold after three years, capital gains on it will be taxed at 20 per cent with indexation benefit.”

Investment tenure for these bonds is eight years, but exit will be allowed from the fifth year onwards. The Centre lists these bonds on the bourses.

Trading cues

The US has a light economic calendar this week with jobless claims data due on Thursday. Gold ended at $1,258.9/ounce on Friday, up about 3 per cent for the week despite strong jobs data. MCX gold and MCX silver futures too ended in the green, but gains were checked by the rupee gaining against the US dollar. This week, MCX gold may try moving further up, targeting ₹30,000-30,100 levels, provided the rupee doesn’t gain much against the greenback. Supports are at ₹29,500 and ₹29,000. MCX Silver may trade between ₹36,000 and ₹37,800.

Published on March 06, 2016

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