2 min read.Updated: 25 Oct 2020, 07:52 PM ISTNeil Borate
Investors who sell SGBs before maturity are subjected to short-term capital gains tax (STCG) or long-term capital gains tax (LTCG) depending on the holding period
Experts speaking at the Mint Money Conversation, presented by digibank by DBS on Wednesday, picked sovereign gold bonds (SGBs) as an investment vehicle of choice for long-term investors. For shorter horizons, they suggested gold exchange traded funds (ETFs), gold savings funds and digital gold. At present, SGBs, ETFs and mutual funds, physical gold through jewellery and bars as well as digital gold and the options avilable for gold investing. SGBs carry a rate of interest of 2.5% per annum and are issued by the government with a tenor of eight years.
“SGBs are the best investor vehicle, but a very inefficient trader vehicle. If you can hold them till maturity, they are one of the best, since capital gains tax is zero. If you sell before maturity, you don’t get this tax benefit," said Feroze Azeez, deputy CEO, Anand Rathi Private Wealth Management.
Investors who sell SGBs before maturity are subjected to short-term capital gains tax (STCG) or long-term capital gains tax (LTCG) depending on the holding period. LTCG applies to periods above three years and you also get the benefit of indexation. “However SBGs are not very efficient for short-term trading. If you wish to hold for a year, selling in the secondary market can mean selling at a discount," he said.
Chirag Mehta, senior fund manager at Quantum Mutual Fund took a contrary view, arguing in favour of gold funds. “The biggest issue with SGBs is liquidity. If I want to invest today, I have to wait for a tranche to come out," he said. Mehta also noted that SGBs are not backed by physical gold but rather by a sovereign (government) promise of payment. Investors want backing of physical gold. “We have not seen the entire assets of ETFs and funds move to SGBs for this reason," he said. “In gold ETFs and funds, you get indexation benefit after three years and this brings down the tax rate to 20%. You don’t have a very high tax rate with gold funds," he added.
Gaurav Rastogi, CEO, Kuvera.in highlighted the benefits of digital gold for those with shorter horizons. He suggested SGBs for long-term investors. “Digital gold can be thought of as a hybrid product. It is backed by physical gold but useful for someone who doesn’t want to buy and store jewellery and pay for making charges," he said. “It has its advantages and disadvantages. It matches the price of physical gold. However, it doesn’t pay interest and you have to pay GST," he added.
A GST of 3% is levied on purchases of digital gold. Rastogi, however, added that investors in digital gold don’t have to bear an expense ratio or deal with tracking error, which applies to gold funds. Tracking error is the difference between the price of the underlying asset and the net asset value (NAV) of the fund investing in the asset. “If you plan to hold for eight years and can wait for fresh tranches of SGBs every month, 2.5% interest is just very hard to beat," he added.
Somasundaram PR, managing director, India, World Gold Council, said digital gold is backed by physical gold, but is not specifically regulated. This can encourage fly-by-night operators in the future, but he added that there were no such concerns with the current set of players in this space.