Investing in gold bonds makes more sense in GST era

Sales of physical gold now attract 3% GST, while there is no cost or tax attached to sovereign gold

With the ninth tranche of sovereign gold bonds (SGBs) issued by the Reserve Bank of India (RBI) on Monday, investors would be wondering if investing in paper gold makes sense vis-à-vis physical gold after the implementation of the goods and services tax (GST) regime. The answer is, yes. 

From July 1, sales of physical gold entails a three per cent GST. Then, there are making charges for jewellery. If you buy a small-denomination coin, making charges range from 6-10 per cent; for bars, the charges are lower. Gold will also attract capital gains tax. 

Bonds don't attract the GST or making charges, and even on redemption, there is no cost or tax. Additionally, you will earn 2.5 per cent interest on the initial amount on SGBs. 

Considering the GST, making charges and cost of storing physical gold on the one hand, and interest rate payment to bonds and availability of dematerilised facility on the other hand, SGBs are clearly more attractive. 

So, should you go for SGBs only or there are other options? The alternative lies in gold exchange-traded funds (ETFs). But the problem is ETFs will have to purchase physical gold of the same amount and keep it as underlying security. This would lead to a tax of three per cent on purchase of physical gold. 

The ninth issue has been priced at Rs 2,780 a gram. And, the tenure of these bonds is eight years. There are several benefits for investing in gold bonds. Bonds are sold at Rs 50 a gram or nearly 1.5 per cent discount to the past one week's average Mumbai gold price of 999 purity gold, as declared by the Indian Bullion and Jewellers Association. 

The experience of SGB investors, in terms of price rise till now, hasn’t great. The current bond issue is third-cheapest in terms of issue price and the cheapest since 2016. This points to the fact that gold investments per se haven’t been remunerative in the past couple of years. Even the bonds are trading at a discount to issue price and all past issues are quoted at a price lower than the issue price of the bonds. That means bonds are available at a discount on exchange platform. However, the liquidity of listed instruments are quite thin, and many times trading volumes are not even 100 grams a day, which implies that there isn’t proper price discovery as well. So it is quite probable that if the buyer order in the exchanges is in double-digits, the price could change significantly. That is why some like Chirag Mehta, fund manager, Alternative Investments at Quantum Mutual Fund, believe that ETFs are better in many ways as the investment is available on tap, they are liquid and backed by physical gold. Hence, prices broadly move in sync with gold price, unlike SGBs which may be quoted at high discount if sellers are more than buyers.

However, experts are still divided over the benefits of SGBs. Former RBI governor Y V Reddy has argued in his article in World Gold Council's June issue of 'Gold Investor', that “the Sovereign Gold Bond is issued by the government, its efficacy is untested and, to my mind, the benefits to both government and bond buyers are not obvious". 

He writes that the government’s current initiatives (regarding gold) need to be taken further, culminating in a comprehensive gold policy that addresses both opportunities and challenges, and that focuses on what gold savings can do for India, rather than whether India can do without gold.