Jewellery vs Paper Gold: What’s the Smarter Gift This Raksha Bandhan?

Raksha Bandhan will be celebrated across India on August 27 this year. As the country gears up to celebrate the special bond between siblings, people are thronging the markets to get gifts for their sisters.

Among the many gifting choices, giving gold jewellery as a gift remains a popular choice on the occasion, as it serves a cultural purpose along with a financial one. Traditionally, gold jewellery holds strong sentimental and aesthetic value but is  also considered an asset which can aid in financial emergencies. This appeal makes it fit in with the theme of the festival, in which brothers vow to protect their sisters.

However, with changing times, people now have more options when it comes to gifting gold. Instead of giving physical gold, people can now consider giving their siblings ‘paper gold’.

What Is Paper Gold?

Paper gold refers to financial assets that derive their value from the price of gold without the investor holding the yellow metal itself. Instead of taking physical delivery of coins or jewellery, buyers hold a digital document or an electronic record representing their ownership of gold. This allows individuals to gain direct exposure to the price movements of gold.

Paper Gold vs Physical Gold

Despite having strong emotional value in Indian households, physical gold comes with certain drawbacks which make it less lucrative as a financial asset. Often buyers have to pay heavy making charges, which are deducted in case the jewellery is resold. Another major concern with gold jewellery is that it requires the holder to pay for bank lockers and insurance premiums.

On the other hand, paper gold resolves some of these problems. Paper gold solves the problem of making charges, storage costs, and the risk of theft as it is dematerialised. Additionally, it can be bought at market rates without paying extra for craftsmanship. Additionally, it provides high liquidity and assured purity, making it a highly efficient tool for financial protection over physical gold.

Sovereign Gold Bonds

Sovereign Gold Bonds are government securities denominated in grams of gold, issued by the Reserve Bank of India. The key advantage SGBs offer over physical gold is that they offer a fixed annual interest rate on the initial investment. This means the investment grows through both price appreciation and the holder gets guaranteed interest income. Additionally, if held until maturity, the capital gains are tax-exempt. No new tranches of SGBs have been issued after the SGB 2023-24 Series IV. However, SGBs can be purchased from the secondary market for the purpose of gifting.

Gold Exchange Traded Funds (ETFs)

Gold Exchange Traded Funds (ETFs) are passive investment instruments which track domestic gold prices. Gold ETFs represent units of gold and are traded on stock exchanges like regular shares. Gifting Gold ETFs requires transferring units to a demat account. These offer more liquidity compared to physical jewellery. Gold ETFs can be bought or sold anytime during market hours at transparent prices. Additionally, there are no making charges, and the purity is guaranteed since each unit is backed by physical gold held in vaults.

Gold Mutual Funds

Gold Mutual Funds are schemes that primarily invest in Gold ETFs. Gold mutual funds offer convenience for gifting. As you can invest small amounts systematically, and professional managers handle the technicalities. Unlike physical gold, which requires a large lump sum payment, Gold Mutual Funds allow for flexible investments while offering the returns of the gold market without locker charges.

Electronic Gold Receipts

Electronic Gold Receipts (EGRs) are regulated exchange-traded securities representing ownership of physical gold stored in accredited vaults. Held in a demat account, they provide flexibility because they can be traded on exchanges or converted into physical gold whenever required. They offer unified pricing and mitigate issues related to purity, which are often faced when reselling physical jewellery. Gifting Electronic Gold Receipts ensures your sister holds a standardised financial instrument carrying zero storage risk and no making charges.

Tax Treatment on Gifting Paper Gold

Any gift received from a sibling is completely exempt from income tax. However, taxation kicks in when the paper gold is sold. For Gold Exchange Traded Funds, Electronic Gold Receipts, and Sovereign Gold Bonds sold on the secondary market after twelve months, the profits are considered long-term capital gains and taxed at a flat 12.5 per cent without indexation.

If sold before twelve months, the gains are added to the seller’s income and taxed at the applicable slab rate. Gold Mutual Funds require a slightly longer twenty-four-month holding period to qualify for the 12.5 per cent long-term tax.

For SGBs, the maturity proceeds are tax-exempt if the bonds were acquired by the original subscriber during the primary issuance and held continuously until maturity. On the other hand, if you buy SGBs from the secondary market for gifting, those units lose the tax-free maturity benefit entirely. Consequently, when SGBs bought from the secondary market are redeemed, the person redeeming them will have to pay 12.5 per cent tax on the profits.

To conclude, choosing between traditional ornaments and financial instruments does not have to be an absolute decision. You can consider gifting both paper gold and gold jewellery as well.

By doing so, the gift of jewellery honours the tradition of receiving a gift that has aesthetic and emotional value and at the same time, the paper gold ensures that your sibling’s finances are protected against future uncertainties.