The recent Budget 2024 announcement has had a significant impact on the gold market in India. The two significant factors in the budget that could affect the demand for domestic gold are –
1) Slashing of Customs Duty – Prices dropped by 6.8%
2) Change in capital gains tax structure for this asset class.
Here’s an in-depth look at the factors influencing gold prices, the resulting effects, and key takeaways for investors.
Investor Takeaways: Emphasis on Gold Funds and Sovereign Gold Bonds (SGB’s)
- Long-Term Capital Gains (LTCG) with SGBs:
- LTCG of SGBs were earlier taxed at 20% with indexation after a holding period of 3 years.
- However, the LTCG rate now stands reduced to 12.5% without any indexation. Since SGBs pay out an annual interest of 2.5% with the advantage of tax-free capital gains if held to maturity, these could be a lucrative option for gold exposure.
- Diversification with Gold Funds:
- Tax Efficiency: Gold funds, including Gold ETFs (Exchange Traded Funds) benefit from a favourable tax regime.
- Long Term Capital Gains were earlier taxed at 20% with indexation benefit if the asset is held for more than 3 yrs.
- However, the holding period is now reduced to 2 years with a flat tax rate of 12.5% for LTCG.
Catalysts for Future Gold Price Movements
Potential for Rebound: Market experts anticipate a rebound in gold prices, driven by expectations of a US Fed rate cut following the softer US PCE inflation data.
Several factors could influence gold prices in the coming months, including: A weak dollar, Festive season demand, US elections, and Central Bank policies. Also, uncertainty in the global markets (with rumours of recession, Iran-Israel conflict etc.) can make investors flock to gold with its safe-haven status.
Experts also believe that a relief rally might occur if the US Fed signals a rate cut in its September meeting.
Conclusion
Investors should stay informed and consider diversified investment strategies, particularly focusing on gold funds and SGBs, to navigate the evolving gold market landscape effectively.
By understanding the revised tax structures and strategically incorporating these options into your portfolio, you can make the most of your gold investments in the current economic environment.