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Gold funds & ETFs lose tax advantage; investors should rethink investment strategy

Gold funds & ETFs lose tax advantage; investors should rethink investment strategy

Mon July 21, 2014


Last year, gold exchange traded funds (ETFs) had gained a great deal from the depreciation in the rupee and the UPA government's move to impose additional levy on gold imports, making it an attractive option for investors. The landed price of the yellow metal had surged, pushing up the net asset value (NAV) of gold ETFs. However, the recent budget proposal by Finance Minister Arun Jaitley has thrown a spanner in the works for gold fund investors. The revised tax structure for all non-equity funds, including gold ETFs and gold savings funds, and the extension of the holding period from 12 to 36 months to be eligible for long-term capital gains, have effectively changed the product proposition of paper gold. Does this mean gold ETFs have lost their advantage over physical gold?


Eroding advantage


To qualify as long-term capital gains, the minimum holding period for gold ETFs (considered as mutual  fund units) was one year, and was taxed either at a flat rate of 10% or at 20% after indexation (where gains are adjusted for inflation).


Physical gold, on the other hand, had to be held for at least three years to be termed as long-term capital gains, taxed at 20% with indexation. Now, the Finance minister proposes to bring physical gold and gold ETFs on an even keel by raising the holding period to 36 months for both and taxing it higher at 20% with indexation benefits, from the earlier 10% for gold ETFs. The move will rob the common man of the advantage of investing in paper gold to some extent. Says Vivek Rege, managing director, VR Wealth Advisors: "There are still lots of factors that make gold ETFs a more efficient alternative to buying gold in physical form."


Owning physical gold, whether certified gold coins and bars, or jewellery, is a hassle. Jewellery, for instance, should never be an investor's pick simply because you have to pay a hefty sum over and above the metal's price as part of wastage and making charges. You will also lose out when you sell it—the jeweller usually deducts 5-10% from the prevalent rate of the yellow metal. While you can buy certified gold bars or coins from banks, you cannot sell them back.


Besides, the actual purity of gold can be suspect. The other concern is the safekeeping of physical gold where you might have to hire a locker to store it, adding to your costs. In comparison, paper gold not only offers the convenience of holding it in the electronic form, but the questions on the purity of the metal do not crop up. Besides, you can buy gold ETFs equivalent to even half a gram of physical gold, allowing you to invest smaller amounts in the precious metal.


Says Neeraj Chauhan, CEO, Financial Mall: "The ability to buy gold ETFs in smaller denominations provides respite to those who cannot shell out a lump sum." Moreover, physical gold also contributes to your wealth tax outgo.


What you should do Gold fund investors may have to rethink their investment strategy. Says Chauhan: "The game has changed for all those who are looking to hold gold investments for less than three years."


If you are invested in gold ETFs, it would be prudent for you to wait till your investment completes three years. "Not much has changed for long-term investors, but those looking to make quick gains from gold investments are stuck," says Rege. Experts say one must take a decision based on the expected gold price movement. If you expect gold prices to fall in the short term, book profits now and invest the proceeds in better alternatives. If you expect gold prices to head north, then stay put.