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Business News/ News / India/  Not equities or FDs, e-gold is all that glitters now
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Not equities or FDs, e-gold is all that glitters now

There are many ways to invest in e-gold, such as government-backed SGBs issued by RBI, gold ETFs, and gold funds that invest in ETFs

Digital gold is a good alternative to physical gold as one can take delivery in cash or gold (Bloomberg )Premium
Digital gold is a good alternative to physical gold as one can take delivery in cash or gold (Bloomberg )

Fixed deposit interest rates are at decade low, while return from equity is still poor, despite the sharp recovery in markets. In 2020, gold has emerged as the best performing asset class with a return of around 30%. Mint explores e-gold investments to help choose the right tool.

What are the ways to invest in e-gold?

There are many ways to invest in e-gold, such as government-backed sovereign gold bonds (SGBs) issued by RBI, gold exchange-traded funds (ETFs), and gold funds that invest in ETFs, besides digital gold offered by mining firms and gold traders through stockbrokers and payment wallets. While SGBs are not backed by physical gold, the investor is paid gold’s market price upon maturity at eight years, besides additional 2.5% on the invested amount. If SGBs are bought online, investors also get a discount of 50 per unit. Gold ETFs and gold funds offered by mutual funds invest the money in physical gold, but charge a fee.

What is the cost of e-gold investments?

For SGBs, there is no additional cost for investors. The commission to banks and other distributors selling such bonds is paid by the government. In case of ETFs, an investor has to bear the expense ratio of up to 1% to the fund house, besides charges for opening and maintaining a demat account. Gold funds that invest in gold ETFs charge an expense ratio and exit load if the investor exits before one year. In case of digital gold, the investor has to pay 3% goods and services tax during purchase, plus bear the spread (the difference between buying and selling price) of 2-3% against the cost of storage, insurance and trustee fee.

Inflows from gold products have been robust this year despite rising prices
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Inflows from gold products have been robust this year despite rising prices

How does e-gold investment fare on the safety front?

SGBs carry sovereign guarantee, and are hence risk-free in terms of repayment. Gold ETFs and gold funds are regulated by the Securities Exchange Board of India which takes care of investors’ interest. However, concerns have been raised about e-gold products as they aren’t regulated. In the absence of a regulator, there investor’s interests may get compromised.

How are the gains on digital gold taxed?

Interest from SGBs is added to the income of an investor, and is taxed according to tax slab. SGB gains are tax-free if held till maturity up to three years. In case the investor exits between three and eight years, the tax treatment will be the same as physical gold—long-term capital gains will be taxed at 20% with indexation if bonds are sold after three years. In case they are sold before, it will be will be taxed according to the investor’s tax slab. The tax treatment of digital gold and gold ETFs and gold funds is same as physical gold.

How should investor choose the right tool?

SGBs are the best option for those who want to hold it till maturity. Though these bonds are listed on an exchange, exiting before maturity may not be possible due to lack of liquidity. Both Gold ETFs and funds offer better liquidity. So, if you want to exit mid way, it is best to opt for them. Digital gold is a good alternative to physical gold as one can take delivery in cash or gold. You can invest as little as 1 in digital gold, but the absence of a regulator is a concern. It works best for very small sums, while gold funds, ETFs work for higher sums.

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Published: 26 Oct 2020, 09:08 PM IST
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