Gold has been a preferred investment option due to its stability, usability, and potential as a hedge against inflation.
However, recent changes in Budget 2024-25 have significant implications for gold investors.
Says Naveen Mathur, director - commodities and currencies, Anand Rathi Shares and Stock Brokers: “Investors looking forward to diversifying their profile find gold as a comparatively secured investment option. Over the past 20 years, gold had provided a compounded annualised growth rate (CAGR) of 13 – 14 per cent in India compared to similar returns in equities over the same period. Equity had been more volatile in between while gold performance had been consistent over the same period.”
What Changed In Budget 2024-25
Traditionally, gold investments have been subject to capital gains tax, whether in physical form or through financial instruments.
So let us understand the changes in physical gold, gold funds/exchange-traded funds (ETFs) and sovereign gold bond (SGB).
For physical gold and gold fund/ETF investment, one of the key changes involves the differentiation between short-term and long-term capital gains.
For gold investments, short-term capital gains before Budget 2024, were those realised within three years of purchase, while long-term gains are those realised after three years. Now the differentiation has been changed to 24 months.
“Also existing short-term capital gains tax (STCG) and long-term capital gains tax (LTCG) were at slab rate with a difference that when it qualifies for LTCG (36 months), you can use the benefit of indexation. Now in the changes made in the Budget, the STCG remains the same, but LTCG will be charged at a flat rate of 12.5 per cent with no indexation benefit,” says Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment advisor (RIA) and chief planner, WealthWisher Financial Planner and Advisors.
However, there is a difference in taxation between gold ETFs and physical gold. Given that gold ETFs are listed, they will be considered as long-term if held for more than 12 months, and therefore, taxed at the lower rate of 12.5 per cent. Physical gold will be considered as long-term investments if held for more than 24 months and will be taxed at the lower rate of 12.5 per cent.
For gold bought through SGB, no changes have been made. SGBs, on the other hand, offer a significant tax advantage, as capital gains are exempt if held till maturity. However, the interest of 2.5 per cent is taxed at marginal rate.
The new rules have been enforced from July 22, 2024 and all purchases/sales before that will qualify for previous taxation.
Another impact was the government reducing basic customs duty on gold and silver from 10 per cent to 6 per cent and Agriculture Infrastructure & Development Cess (AIDC) from 5 per cent to 1 per cent. This means effectively with GST, overall taxes on gold would come down by nine per cent.
Now this announcement crashed gold domestic prices as a cut in duty means, new gold prices will go down. This means the existing gold investment will have a lower value.
“This is bad for existing gold investors as it is like devaluation of assets. It is even bad for SGB investors whose maturity is coming soon. As SGB maturity is tied with prevailing local gold prices,” says Krishna.
Should You Invest?
Says Mathur: “Considering a simplified and lower tax structure for domestic gold one should start to accumulate gold on further declines of 2-3 per cent from current levels considering long-term bullish factors in place.”
This includes geopolitical uncertainties that may remain moderate till the end of 2024 and continued central bank buying, making gold a favourable investment asset and a safe haven hedge in uncertain times. Investors should always allocate some gold to the tune of 10-15 per cent to provide stability to the overall portfolio.
Looking at the tax advantage of Gold ETFs over physical gold, investment in gold should be preferably done through gold ETFs.
“Finally, whether you invest in gold depends on your investment goals, risk tolerance, and time horizon. Gold remains a strong hedge against inflation and economic uncertainty. For those who prefer liquidity and tax efficiency, gold-backed financial products like ETFs and SGBs continue to be appealing options,” says Krishna.
