Electronic Gold Receipts Offer Investors Another Avenue To Diversify Portfolio

The BSE Ltd. has started trading in electronic gold receipts or EGRs this week following the clearances by market regulator Securities and Exchange Board of India.

The receipts allow investors to hold gold in the dematerialised form.

Earlier this week, the BSE announced it would start trading in electronic gold receipts with two new products of 995 and 999 purity. That commenced this week in multiples of one gram.

On Tuesday, as of 2 p.m., only two trades had taken place on one of the four electronic gold receipts offered by the BSE. The prevailing price on the exchange stood at Rs 5,090 per gm for the 999 purity receipt, Rs 9 lower than the previous close.

The exchange, as stipulated by SEBI, is holding gold in physical form in its vaults as underlying for the receipts that are been traded. It is also facilitating delivery of physical gold in multiples of 10 gm and 100 gm.

Investors will be able to use their demat accounts to buy and sell the receipts, much like the trading of equity shares.

Prior to the introduction of electronic gold receipts, investors had two options to buy non-physical gold: the sovereign gold bond issued by the Reserve Bank of India on behalf of the central government; and gold ETFs.

The RBI periodically issues the sovereign gold bond, which bear an interest rate of 2.5% and are redeemable with no capital gains after eight years. Investors can choose to redeem these bonds earlier, after five years, but then it will attract capital gains tax. The bonds are also bought and sold on stock exchanges, but liquidity has so far have been low.

Gold ETFs, offered by asset management companies, allow investors to buy and sell gold in the digital form. They are similar to electronic gold receipts, in that gold is held in physical form with a custodian bank as underlying to the units of the ETF. The only difference between the two is that the receipts allow an investor to buy and sell gold directly, rather than through an asset management company.

Both gold ETFs and receipts will attract capital gains tax. The gains made are taxed at the long-term capital gains tax rate of 20% if the investment is held for more than three years. In this case, the investor can avail indexation benefits, which allows for the calculation of tax net of the prescribed rate of inflation. For example, if the compounded rate of return over three years on an investment in gold is 10% and the inflation rate decided for the calculation of indexation benefits is 5%, the tax applicable is 20% on half of the total gain.  

If the investment is held for less than three years, the gains are taxed at applicable income slab rate.