Culturally, Indians have an affinity towards buying Gold as an investment, and without a doubt, Gold is a much-favored asset class of Non-Resident Indians’ (NRIs) after Real Estate. With India being the highest consumer of Gold in the world, the lure of the yellow metal has scored over other asset classes for NRIs also. Gold as an asset class, provides hedge and is known to remain steady even when the stock markets are bearish and real estate growth is stagnant. However, most financial experts advise on investing in gold only to diversify the portfolio.
Gold as an Asset Class
Investments in gold are primarily done to diversify the portfolio and hedge against possible losses in other asset classes. Historically, Gold has a low correlation to all other asset classes such as equities, debt, real estate, etc. Thus, gold aids in preserving the value of a portfolio when other asset classes are underperforming. The risk of a portfolio enduring severe loss is mitigated by taking a partial exposure to gold.
Nevertheless, gold is not a very productive asset class with the long-term returns seldom beating asset classes like equity. Most financial experts do not recommend more than 15% exposure to gold in a portfolio.
Gold Investment Options in India
Buying physical gold is the preferred way of investing for the majority of Indians including NRIs. Physical gold is available in the form of jewelry, bars and coins. Gold can be bought in paper/digital form either as Exchange Traded Funds (ETFs), Bonds, Gold Funds etc.
Physical Gold: Gold jewelry is the most popular way of buying gold by NRIs. Though jewelry has an aesthetic and traditional appeal, it is not the ideal way to invest in gold as they come with very high making and wastage charges. Also, not every individual will be comfortable selling the jewelry when the need arises. Gold bars and coins are readily sold by established jewelers and banks in various denominations. This form of gold available is pure 24 karat gold with international assay certification of purity.
Buying gold in physical form carries a lot of disadvantages, some of them being:
- Physical gold comes with the added responsibility of safeguarding it in a secure locker, which results in additional costs.
- Unless the gold bars and coins are bought by authorized banks, the purity of them cannot be ascertained correctly if bought from jewelers.
- There is always an additional premium for buying physical gold such as making charges for jewelry, taxes applicable for coins and bars etc.
- Selling physical gold may not be effortless as the conversion value at the time of sale might be lesser than the total amount paid during the purchase.
- Physical gold, if held for more than 3 years, qualifies as a long-term asset and any gains made out of the sale is subject to tax.
Paper Gold: Paper gold or gold in digital form is available as Gold Bonds, Gold ETFs and Gold Funds.
Gold ETFs – ETFs invest money only in gold bullion or in gold producing companies. Gold ETF is an open-ended scheme and the units are traded on stock exchanges. ETFs are passively managed and aim to generate returns closer to the returns on physical gold during a given time period. There are two types of gold ETFs – Gold Price ETF which is associated with the Gold Price Index and Gold Stock ETF which invests in companies involved in gold mining, refining and production. For an NRI to invest in Gold ETFs, option to buy from the stock exchange or to buy from fund houses are available. To buy from the stock exchange, an NRI needs to have a Portfolio Investment Scheme (PIS) account and to buy from a fund house, an NRI has to compulsorily buy and sell in multiples of 1000 units only.
Gold Funds – Gold Funds are mutual fund schemes which invest in companies associated with gold mining and production and Gold ETFs. However, the investment strategy of the fund is dependent on the fund manager and the returns on the fund may not be same as the actual returns on the gold asset class. NRIs can invest in Gold Funds in the same way as investing in a mutual fund.
Gold Bonds – To discourage people from buying physical gold, Government of India has introduced Sovereign Gold Bonds which allow gold purchase in dematerialized form. Also, the bond provides a coupon rate of 2.5% per annum. However, these bonds cannot be purchased by NRIs.
Gold available in above forms, allow investors to take exposure to this commodity in non-physical form. Buying gold in the aforesaid forms, has many advantages to NRIs, some of them being:
- Taxability – Gold ETFs and units of Gold Fund has to be held for at least 36 months to qualify as a long-term On selling any of the aforesaid investments, an NRI has to pay Long-Term Capital Gains (LTCG) Tax at the rate of 20% of the gains. If the ETFs are sold through an exchange, Tax is not deducted at source for NRIs and a self-assessment has to be done when filing tax returns.
- Liquidity – Unlike physical gold, ETFs and Gold Funds can be sold easily.
- No security required – Since all the gold holdings are in paper form or demat form, there is no additional security required.
- Purity – Since the ETFs and Funds invest in pure quality gold or in gold producing companies, purity is not a cause for worry.
Should NRIs buy physical gold in India or abroad?
NRIs are allowed to bring physical gold in the form of jewelry, bars and coins up to 1 kg, from their country of residence to India. On arrival in India, NRIs have to declare the amount of gold they are carrying and are bound to pay import duty on it. The import duty is calculated at 10% of the “notified value” in the case of jewelry and at 4% of the notified value in case of gold bars bearing weight, serial number and the manufacturer’s name.
For NRIs wanting to invest in physical gold, buying gold in India might not be a good option as it is subject to import duty and other local taxes. Also, carrying physical gold into the country of residence might attract import duty in the country of residence also. However, if an NRI is looking to buy jewelry, buying in India may be the best option as the making charges for intricate jewelry are comparatively less in India compared to other countries.
Repatriation of gains
If an NRI has made investments in Gold ETFs or Gold Funds, the repatriation rules are same as that for direct equity and mutual funds respectively. If the investments were done through remittances from abroad into Non-Resident External (NRE) account or Foreign Currency Non-Resident (FCNR) account, the gains made can be repatriated. If an NRI has made investments in Gold from Non-Resident Ordinary (NRO) account, the gains cannot be repatriated.
If an NRI sells physical gold brought from abroad in India, it can be repatriated from NRE account subject to the condition that the buyer has deducted tax at source (TDS).