Gold ETFs: Union Budget has taken the shine out of them

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Gold ETFs: Union Budget has taken the shine out of them
Finance Minister did two things that have made Gold ETFs unattractive after the Union Budget 2014.
First, he hiked the long term criteria for non equity mutual funds from 1 year to 3 years and second he hiked the capital gains tax on them to 20 per cent.

Now, non equity mutual funds would also include Gold ETFs and instruments like debt funds, FMPs etc.
Investors in Gold ETFs would now have to hold the Scheme for three years to end-up paying long term capital gains as against the earlier period of 1 year.

Also, if earlier as a Gold ETF holder you were paying 20 per cent long term capital gains tax with indexation or 10 per cent without indexation, that has changed after the Union Budget. Now, as an investor of Gold ETF you have to pay 20 per cent capital gains tax.

This has made Gold ETFs unattractive in the current context.

Gold prices going nowhere

Gold ETFs which track gold prices, have themselves become unattractive over the last few months as gold prices have fallen.

It's unlikely that gold prices would recover anytime soon, given that ETFs themselves track gold prices globally.

In the international markets much would depend on what the US Federal Reserve does with interest rates, which could determine the movement of gold. Should the US Federal Reserve hike interest rates in the near term, it could lead to a rise in international gold prices and hence gold ETFs in India.
For the time being investors seem to be happy chasing equities and shunning gold.


It looks like Gold ETFs face a double whammy from increase in long term capital gains tax and also increase in the long term holding period from one to three years. If you consider buying an ETF wait for prices to soften further, before entering the same.

Read more about: gold etfs
Story first published: Saturday, July 19, 2014, 9:34 [IST]
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