Will the Union Budget 2024 impact gold prices in India’s domestic market?

Buying gold is a long-standing cultural practice in India passed down through generations. People buy gold during festivals like Diwali and Akshaya Tritiya since buying gold is associated with the arrival of fortune and prosperity. Many families view gold as a safe way to save money because its value tends to improve over time. Thus, gold continues to retain a special place in many Indians' hearts and homes. It is also viewed as a good investment apart from bearing significant cultural importance.

When it comes to investing in gold, people in India have various options. Jewellers and banks sell actual gold in the form of jewellery, coins, or bars. Another option is to invest in Gold Exchange-Traded Funds (ETFs), which are traded on the stock exchange and represent gold electronically. Sovereign Gold Bonds (SGBs) are also popular, as they are issued by the government and pay interest in addition to the value of gold. Digital gold is a new option that allows investors to acquire gold online via numerous apps and platforms. Each method has distinct advantages and disadvantages in terms of safety, cost, and convenience.

With the skyrocketing prices of gold, people have been deterred from buying gold. Since the announcement of Union Budget 2024, buyers, jewellers and bullion traders are hoping to get some relief from the taxes and duties that could impact domestic prices of the noble metal.

Union Finance Minister Nirmala Sitharaman will be presenting the first budget of the Modi 3.0 government on July 23. Ahead of Union Budget 2024, mid-day.com spoke to some consumers and experts about what they hope from Sitharaman's financial plan for the nation.

Consumers speak

Alisha Agarkar', a Mumbaikar, speaking to mid-day, said that she believes in buying gold in small amounts every month and deems it the safest option of investment compared to others.

"I believe in buying some amount of gold-like a coin-every month since I believe it is a safer option. One does not have to worry much about how the market is faring as people do for other investment options like stocks. One can buy and sell gold at their convenience," Agarkar said.

Similar to Agarkar, Oaishi Furtardo' opines that she prefers buying physical gold. "I prefer going in person to purchase gold and it is a safe yet good asset to have since gold prices rarely drop,' says Furtardo who lives in the western suburb of Malad.

The Mumbaikar added that despite feeling the pinch while investing in gold, she continues to invest in it.

Savio Pashna, who works for a city-based NGO, said that he too believes investing in gold is a safe option and that he has been doing so digitally. "I do believe in buying gold digitally. I believe it is a safe option because it has proven to be a stable yet appreciating asset over the years. Besides, I have always desired to own gold, along with the ornaments passed on to me as heirloom," he said.

When asked about how he deals with the volatility of the gold market, Savio quipped, "I have been investing a small amount of in digital gold daily, I invest 1001 rupees daily through an app that helps me buy gold. And no, the extra 1 rupee is not for auspiciousness."

While Sanskar R', a native of Bengaluru, said, "Gold for me is a safe investment as long as it is from a medium to long term investment. My investment in gold is based on historical data, which shows that gold generally provides higher long-term returns than fixed deposits. Sovereign Gold Bonds (SGBs) are my preferred alternative because they pay an additional 2.5 per cent interest on top of gold's appreciation."

He added, "Furthermore, gold is an important aspect of my investment approach because it moves inversely to the stock market. Although I'm not an expert, I've seen that when the stock market falls, gold prices often climb, as they did during Covid-19. Another benefit of SGBs is that they are tax-free if kept until maturity after 8 years."

When asked about do they expect cuts on taxations and duties on gold in Union Budget 2024, Savio said he has no particular expectations however is "very excited to know what the budget holds for commodities as a whole and bullion in particular as an asset class".

Agarkar and Furtardo both agree that buying gold for a middle-class man has been an arduous task.

However, Agarkar opined that if the government reduced import duty, gold prices would lower a little enabling the common man to "buy gold (even in small quantity) for secured investments".

Bullion traders speak

When mid-day reached out to India Bullion & Jewellers Association Ltd (IBJA) spokesperson CA Surendra Mehta on what expectations traders have from Union Budget 2024, he noted that the industry is expecting a reduction in the duties levied on the import of gold. Mehta suggested that if the government also approves bullion export, it will benefit the country's economy.

He elaborated, "The government could reduce duty by 5 per cent which will make gold cheaper in the domestic market. We are hoping the Indian government permits bullion export; at present India is not a bullion exporter. If it happens, it will be a win-win situation."

"If the duty is reduced, gold will become cheaper for customers and capital gains tax will be lower in tandem with the duty. Given the price rise, we are struggling to maintain our inventories. The government will not lose revenue if they cut duty slightly," said Mehta.

When asked what they think the government should do to provide relief, Mehta suggested that the sale of gold should be exempt from capital gains tax as this could encourage more to come and sell their old jewellery. At present, we have to import gold, he stated.

Mehta, when asked about changes in consumer behaviour since it was announced that Union Budget 2024 will be presented on July 23, noted, "June and July months have been slacked; in this season, buyers are anyway less however with announcement of the budget, the public buying gold has lowered further or is buying smaller pieces of jewellery. In case there are slashes in duty and taxes, it would encourage customers to buy gold."

Investor speak

Kavitha Menon, a SEBI-registered Investment Adviser, told mid-day.com that gold prices and budget announcements are not correlated. "Gold prices fluctuate based on the international indices, especially the dollar. The value of the dollar and gold is inversely proportionate. As soon as the dollar weakens, gold prices go up," said Menon.

"From Rs 30,000 in 2020, the gold has now increased to nearly Rs 70,000 which is over a 50 per cent jump in prices. Gold prices will be ultimately affected by global trends. With the world, especially big players like China, Russia and even India are trying to get out of dollar trade and have been investing in gold instead," she remarked.

Explaining the price rise, she added that Chinese and Russian buyers have been hoarding gold for quite some time, leading to the price rise globally. Additionally, the duties and taxes levied in the country can make gold costlier in the domestic market.

Responding to a query about how the potential announcements in Union Budget 2024 over reduction/increase in duty or taxes will impact the domestic gold market, she opined, "It is difficult to foresee what presentations she (Nirmala Sitharaman) makes in her budget presentation. However, the government is less likely to lean towards increasing duty on gold since it could give rise to underground trade (black marketing, smuggling of gold)."

Menon also highlighted that the government should consider introducing a policy that equalises the degree of taxation while investing in gold. She said that the tax brackets for ETF, SGBs, and physical gold are currently varied. ETF is fully taxed while only a 20 per cent tax is levied on physical gold.

The purchase of physical gold is subject to a 3 per cent GST, which includes any import duty or cess. When selling actual gold, capital gains tax applies. Long-term capital gains (LTCG) are taxed at 20 per cent plus a 4 per cent cess after 36 months of ownership, with the option of indexation or a flat 10 per cent tax rate. Short-term capital gains (STCG) from sales within 36 months are taxed based on your income tax bracket.

"Right now, there's no parity in taxation; the highest amount of taxes are levied on ETF while those holding physical gold have to pay 20 per cent tax after 36 months of ownership while the sale of gold within 36 months is taxed based on the income tax bracket. SGBs are tax-free after a tenure of eight years. The government should work towards bringing parity in taxation and give relief to those who invest in ETFs. It is a better form of holding gold, it can be monetised in some way," said Menon.