Gold EMIs can cost you dear

Although the process is simple, the interest charged can reduce your gains.

With gold prices soaring consistently for the past one year, it may not always be easy to buy the yellow metal in one go. Although your family jeweller may be offering recurring deposits such as a gold saving scheme, you cannot fall back on the option for investment purposes. And, this is where non-banking finance companies (NBFCs) are stepping in.

Muthoot Finance and Mannapuram Finance are offering schemes whereby you can purchase 24-carat gold coins or biscuits on instalments. “Such a scheme is the best way to purchase gold — if you cannot afford to pay a huge sum at one go —for both investment and consumption purposes,” says Avinav Chaubey, head-marketing, Muthoot Finance. Banks and jewellers, however, do not offer similar schemes. You must pay the entire amount upfront to purchase gold from them. Banks charge 10-15 per cent more than a jeweller.

The process of buying gold on instalments from NBFCs is simple: Decide the quantity you wish to buy (the most commonly offered grammage being 2, 5, 10, 20 and 50), pay 10-20 per cent of the total cost upfront, and pay the remaining in instalments over a tenure of 12 or 24 months. But there is an interest element as well. You will be charged an interest of 10.5 per cent annually. A 50-gram gold biscuit from Muthoot Finance would cost Rs 1,12,842 as on January 11, inclusive of taxes (VAT and service tax).

After making a down payment of Rs 11,750 (10 per cent of the cost), the remaining can be paid via equated monthly instalment (EMI) of Rs 9,356 over a 12-month period. The gold is handed over to you after you complete the entire payment. The total amount paid through EMIs comes to Rs 1,12,272. Add to it the initial down payment of Rs 11,750, the total cost comes to Rs 1,24,022.

In comparison, a 50-gram gold biscuit bought by making full payment would cost Rs 1,12,842 from Muthoot. The same biscuit bought from HDFC Bank would cost Rs 1,19,832. Account holders and priority customers can expect a discount of around five per cent.

Although buying gold becomes simpler through EMIs, the interest charged can reduce your gains. While NBFCs are enticing buyers with a price that will be fixed as on the purchase date and despite the continuing rise in gold prices, a 10.5 per cent rate of interest will reduce your gains.

If you can afford to pay the entire amount at one go, typically, your local jeweller will offer the best deal. A local jeweller would sell a 50-gram gold biscuit at Rs 1,03,150, thereby saving Rs 20,872 (if purchased from an NBFC) and Rs 4,190 (if purchased from a bank).
 

COST DIFFERENCE WHILE INVESTING IN GOLD
	Bank	NBFC	Jeweller
Purchase	Entire amount to be  paid upfront	Down payment - 10-20%,  rest in EMIs	Accumulate with jeweller every month for 1-2 years. Buy jewellery at end of period
Rate of Interest	NA	Annual rate of 10.5 %	NA
Buy-back	No	No	Will pay 5% less
Premium while  purchasing	Charges a premium  of around10-15%	Charges a premium  of approximately 8-10%	No
Tax on sale	NA	NA	STCG (if sold within three years); LTCG (if  sold after three years); No tax payable if  converted into jewellery
* Short-term capital gains tax (STCG): gains added to individual’s overall income and taxed as per slab applicable * Long-term capital gains tax (LTCG): gains taxed at 20% + 3% education cess (gains calculated after indexation)

Of course, there may be concern about purity. A local jeweller may or may not give such a certificate. “The receipt given by jewellers is the only certification in most cases,” says Jitendra Jain, owner, Jugraj Kantilal & Co, a jeweller.

Selling, however, is an issue. Banks and NBFCs do no buy the gold back. At best, they may give you a loan against it. The rate at which you sell the gold is jeweller-specific. But, selling it to a jeweller comes at a cost. If a 10-gram gold is priced at Rs 20,000, a jeweller would paygive you Rs 19,800, if they are satisfied with the quality.

On the other hand, bigger names such as Tanishq buy the gold back at five per cent less than the selling rate for the day, but do not pay cash. You can redeem the same in exchange for jewellery.