If you are looking to invest in gold in India, you have a plethora of options. First, let us see what you need to do before investing in gold, the reasons why you need to invest, the tax liability, the various investment options and everything you wanted to know on gold. We have highlighted everything conceivable you need to know on gold investment in India.
What documents you need to invest in gold?
If you are investing in physical gold (gold bars, gold coins, jewellery) above Rs 2 lakhs, the one thing that you need is your PAN Card. So make sure you have your PAN card. To now how to apply for PAN card, click here
If you are investing in gold ETFs, you need to open an account with a brokerage firm along with a demat account. We tell you later in the article, why you should buy gold ETFs and not gold coins, gold bars and gold jewellery.
How to buy physical gold, gold ETFs and Sovereign gold bonds?
To buy physical gold, it is very simple. All you need to do is walk into the jewellers shop and buy gold with your PAN card. Now, here is the warning - if you are investing do not buy gold jewellery, but go ahead and buy gold coins.
This is because jewellery has making costs, which you do not recover when you sell. Your best option is to buy gold ETFs, because there is no worry of theft, storage and they can easily be sold. The best thing is that it tracks gold prices. Selling physical gold means the jeweller takes his margins.
All you need to buy gold ETFs is just ask your broker to buy after opening a broking and trading account. There are many listed gold ETFs like Goldman Sachs Gold ETFs, which is the largest, Kotak Gold ETF, SBI Gold ETF etc. Sovereign gold bonds are also listed and you can buy them in the same way as you buy listed shares. Check gold prices in India here
Why to buy gold ETFs and sovereign gold bonds?
Physical gold can be stolen, while gold ETFs and Sovereign Gold Bonds cannot. There are making charges for gold jewellery and expense ratio in gold ETFs, but, there are no such charges on sovereign gold bonds.
On redemption sovereign gold bonds do not attract tax, while physical gold attracts a tax of 20 per cent after applying indexation. Not only this, Sovereign Gold Bonds give you an interest rate of 2.5 per cent payable semi annually.
Gold ETFs and physical gold do not. Gold ETFs have their own advantages as mentioned earlier, but, not as much as the bonds. So, Sovereign Gold Bonds is what you should be buying.
Why you should buy gold?
The often asked question is: why should I buy gold? Let us tell you the answer. Let us assume that you put all your money into shares, thinking that gold is a dead investment.
We all know what can happen to shares. In 2008, after the Lehmann Brothers crisis, gold prices doubled in three years and has returned almost three and half times since 2008. This is because the world's economy collapsed and investors took shelter in gold. So, as a measure of diversification you must have gold in your portfolio.
Analysts suggest that there should be a 10 per cent investment in gold in the portfolio, though many consider it as a dead investment.
What is 22 karats and 24 karats gold?
If you are a beginner to investing in gold, you should know the difference between 22 karats and 24 karats gold. 24 karats is almost 100 per cent pure, but usually it is considered as 99.99 per cent pure.
You cannot use such high purity gold to make jewellery because gold is brittle and the jewellery will break. So, gold is alloyed with copper or any other metal so as to ensure that the jewellery does not break.
This in essence is 22 karats gold, which is 91.6 per cent pure. In many countries you find gold of lower purity including 18 karats and 12 karats. It goes as low as 8 karats. If you are buying jewellery, it has to be 22 karats ideally.
On the other hand, if you are buying gold coins and gold bars it would be 24 karats. So, the choice is yours. We have already recommended to buy gold ETFs and sovereign gold bonds, if you are an investor.
A guide to hallmarking of gold in India?
If you are a beginner to investing in gold, you should buy hallmarked gold in India. This is because hallmarked gold is essayed and there is a stamp of authenticity on the purity of gold.
Hallmarking means the Bureau of Standards Certified Centres assure you on the purity of gold. At the moment there are very few hallmarking centres in the country. There is an ongoing demand to increase these centres.
The important thing to look when hallmarking of gold is the logo of the hallmarking centre and the year on which the hallmarking was done. All these hallmarking centres come under the Bureau of Indian Standards.
Factors that impact gold prices in India?
Beginners to investing in gold must understand the various factors that influence gold prices in India. Amongst the biggest of these is international gold prices.
These depend a lot on US Fed interest rates, geo political tensions and general buying and selling and demand in the international markets. For example, when the US Fed raises interest rates gold prices fall and vice versa.
Indian gold prices derive their rates from international prices and they can impact rates. The other thing that impacts gold prices is the rupee movement against the dollar. When the rupee gains against the dollar, gold prices in India become cheaper. On the other hand when the rupee drops against the dollar, gold prices become cheaper. Check currency rates here
Another factor that impacts gold price is the local tariffs and import duties on gold. When they are reduced gold prices drop and vice versa. It should be understood that inflation and interest rates also affect prices, but, these are more like long term impact. Policies of central bankers across the globe also have a bearing on prices. This is because when there is monetary easing gold prices tend to go higher and when there is tightening, they would fall. These are far more complicated to understand and should be viewed against a backdrop of prices.
Taxes on gold
If your gold is valued at more than Rs 30 lakhs, you would need to pay a wealth tax on gold every year. Remember, not many individuals know of this provision.
The valuation of the gold would be done as on March 31, 2017. Failure to pay wealth tax at 1 per cent of the amount of gold beyond Rs 30 lakhs could also result in seizure. Gold ETFs and physical gold also attract a capital gains tax of 20 per cent with indexation and if sold after 36 months, attract a long term capital gains tax.
So, gold is definitely taxable and you need to pay accordingly. Capital gains tax means that you buy and sell gold at a profit.
Buying gold in the futures market in India
You can also buy into the gold futures in India. In the gold futures, you have to settle your contract before the expiry of the contract. So, if you buy a fold future with a March contract, you need to square up your position before the end of March. In a futures contract you do not pay the entire amount of gold, but only margin money. So, your exposure is many times higher than usual. However, we wish to state that this is a very high risk play and generally only people who are high networth individuals take a risk in these kind of markets.