“The recent continuous rise in the prices of bullion have created fresh interest and generated curiosity of the general public in Gold. Traditionally Indians purchase gold on all conceivable occasions, be it Diwali, marriage in the family, receipt of annual bonus etc. We generally purchase gold in physical form, be in the form of coins or jewelry. But there are other ways too in which you can purchase or invest in Gold. You can either purchase the gold in physical form or in electronic form.
Here I would like to discuss a product called -Gold which has the ideal combination of characteristics of both the forms physical as well as electronic. In e-Gold, gold is held in electronic form and can be converted into physical gold with the same ease as the way you can convert the money lying in your bank account into a physical currency.The National Spot Exchange Limited has launched e-Gold in March 2010.
How does E-Gold work:
Since e-Gold can only be purchased in electronic form, you need to have a demat account. The existing demat account which you are using for transacting your shares etc. does not work for holding e-Gold units. Hence, you need to open a separate demat account with one of the depository participant empanelled with the National Spot Exchange Limited. The list of such depository participants can be downloaded from the web site of National Spot Exchange.
In addition to having a demat account with one of the Depository Participant (DP) empanelled with NSEL for keeping your e-Gold units, you also need to have a client’s account with any member of the NSEL. Presently there are around 380 trading members empanelled with NSEL, spread across length and breadth of the country. These are spread to tier II cities like Rajkot, Patna, Lucknow, Vijayawada, Jaipur, Jodhpur, Bhopal and Indore. The trading in the e-Gold can be done from Monday to Friday between 10.00 AM to 11.30 PM. All the units of e-Gold issued by the exchange are backed by equal quantity of gold in its vaults. The purchases can be made either by making a phone call to the broker member with whom you have opened your client account or through online trading access provided to you by the broker member, during the business hours indicated above.
The purchase of e-Gold has transaction cost implications. The broker will charge you brokerage for purchase or sale of the e-Gold units. This varies between 0.25% to 0.50% like brokerage charged by your share broker for purchase or sale of shares. In addition to the above broker will recover transaction cost @ 20 per lakh, which is charged by the exchange. In addition to above you have to pay a very small amount for each transaction of sale of units in electronic form to the depository paricipant.
Apart from the transaction costs, you have to pay your depository participant, where you have you demat account annual maintenance charges This is around Rs.300/- per annum. Earlier the exchange used to charge for recovering the costs involved in storing the Gold in safe deposit vaults. However the same has since been discontinued. You are allowed to do trading in the e-Gold units during the day but all the outstanding position at the end of the day should result into delivery or payment. The delivery and payment mechanism in respect of e-Gold is similar to that of stock exchanges. In case of short delivery etc. there is an auction mechanism, the way it is conducted in BSE and NSE.
Conversion of e-Gold into physical gold:,Like your bank where you can always request your bank to give you moneyÂ in currency notes equal to amount lying in your bankÂ account, in case of e-Gold units also you can request the exchange to give you physical gold equal to e-Gold units lying in your demat account. For converting your electronic units into physical units you have to surrender the electronic units with a request for physical gold. You have the option to take the delivery of the physical gold at any place where NSEL has delivery centers. Presently the exchange has delivery centers in Mumbai, Delhi and Ahmedabad.
The exchange presently offers you the option of exchanging your E-Gold units into coins/bars of 8 grams, 10 grams, 100 gram and 1Kg and any combination thereof. The exchange, levies an amount of Rs. 200 each for conversion of 8 gram and 10 gram coins. For 100 gram coin the charge is Rs. 100/-. For 1 Kg bar, the exchange does not charge anything. In addition to the above charges for you will have to pay VAT and Octroi for conversion of demat units into physical coins. The VAT rate varies from state of states. In Maharashtra VAT is 1% fixed and Octroi applicable in case of Mumbai is 0.10%. For each case of delivery, you will have to pay Rs. 200 for delivery charges, irrespective the quantity of the delivery desired. Please note that these charges are levied only when the physical delivery is taken. In case the e-Gold units are sold in electronic form, these charges are not applicable.
The e-Gold units will be treated as Gold for tax purposes. The units should be held for more than 36 months for availing the confessional tax treatment accorded to long term capital gains and for exemption eligibility under Section 54 F or 54 EC of Income Tax Act, 1956. You will also have to pay wealth tax on the market value of the electronic units lying in your account as on 31st March of each year, if the total value of your taxable wealth together with market value of e-Gold exceeds Rs. 30 lacs.
Benefits of E-gold :
Since the NSEL operates on a pan India basis, the price quoted for e-Gold is same across India. This eliminates the price bias due to geographical reasons. The e-Gold units have twin character of physical assets as well as financial assets and can be liquidated like your shares. So you can have liquidity at your will. In case of e-Gold units, the difference between the net selling price and purchase cost is as low as Rs. 10 per gram whereas the same difference in case of physical gold is quite higher. This ensures higher returns if the e-Gold units are purchased for investment. Moreover since the gold is held in electronic form, you save on locker charges. An investor does not have to worry about the purity aspect of the gold as the units are always saleable at equivalent price of gold any time. In case you decide to take physical gold, you are given physical gold duly certified which takes care of purity concerns.
Since the price quoted is transparent, it ensures efficient price discovery for purchase and sale, which is not the case if you are holding the gold in physical form. Moreover it is not so easy to sell your physical gold as is the case with E-Gold, which you can do by a click.
e-Gold has converted a physical asset into a financial asset. Now with e-Gold you can very conveniently implement periodically, the concept of assets allocation and balancing among different asset class like equity, debt and bullion as the cost of transaction is low.
Additional feature is with e-Gold you can accumulate gold for your social obligation in very small quantities at very economical prices.
I feel e-Gold in due course will change the way people invest in gold in the long run and hold their gold.