If I decide to buy gold jewellery or coins etc by converting my gold ETF into physical gold, do I still have to pay capital gains tax? In other words, if I liquidate my gold ETF and buy the exact equivalent physical gold on the same day in the same neighborhood, will it be treated as if I have made a capital gain?
If it is so, gold ETF is actually disadvantageous if you regularly invest in gold ETF for a future family wedding, as at the end of the investing cycle what you have on hand is the gold units you purchased minus 20 per cent towards tax? This I feel is a substantial loss as compared to the 5-10% jewellery shop losses?
Kindly advise me.
- P. Rajagopalan
There is no difference between physical gold and gold ETFs on the taxation aspect. The rate of capital gains tax levied on both assets is the same. Gold Exchange Traded Funds (Gold ETF) are a good alternative to holding gold in physical form. In fact, Physical Gold attracts wealth tax whereas, Gold ETFs are exempt from it.
Gold ETFs invest in physical gold of 99.5 per cent purity. A gold ETF invests 90-100 per cent in physical gold sourced from the RBI approved banks and 0-10 per cent in debt instruments to meet any redemption needs. You can instantly sell Gold ETF units through the stock exchange. But usually, physical gold is difficult to sell. The jeweler may deduct substantial wastage, losses and usually allows you only to buy new gold in place of your old gold.
As for converting gold ETFs to physical gold, most ETFs allow investors to convert only a minimum of one kg of physical gold, except Motilal Oswal's Gold ETF which allows investors to redeem units for a minimum of 10 grams of gold. Whether you redeem your Gold ETF either in cash or for physical gold, you have to pay tax on capital gain which is proposed at 20% with indexation if held for long term. Long term here means 36 months or more. If the units are redeemed before completion of 36 months, redemption amount would be taxed as per your tax slab.
Gold ETFs charge expense ratio from its NAV. The expense ratio as at 31st March was at 1.42% for Motilal Oswal MOSt Shares Gold ETF. If you buy physical gold now and wish to store it for use after 20 years, you will have to incur storage costs which can be substantial and also suffer the risk of theft or damage. If you insure against it, that entails a cost too. If you buy jewellery now and want to exchange it at time of use for better designs you will again incur a loss of 5 to 10%. Thus, Gold ETF comes out as a clear winner on all these aspects.
This article was originally published on September 16, 2014.
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