Return in investing in FDs vs return in investing in gold

An investment should provide safety, returns, liquidity and help in beating inflation. Certain investments are capable of delivering high returns with high risk such as gold. The investment and return are always linked to the market price. Certain other investments can give assured returns with low risk such as fixed deposits. Fixed deposits are not tradable instruments or commodities and hence the returns are not influenced by market value. The returns are based on the interest rate at the time of booking the fixed deposit.

Return on investing in a fixed deposit: The interest rate on fixed deposits is 5.1% for one year tenure and 5.3% for a three-year tenure. The returns are guaranteed in nature and fixed for the term of the deposit. The value of the fixed deposit certificate is not subject to market forces unlike commodities or tradable instruments. In a case you make a fixed deposit for five years, you can also claim a tax deduction in the year of making the investment.

The returns in a fixed deposit do not beat inflation in a big margin. However, there is a safety of obtaining the returns and the principal amount of deposit. The return is taxable as interest income. A senior citizen aged 60 years and above can also claim a tax deduction up to Rs 50,000 on such interest income. Also, in case the interest exceeds Rs 40,000 (Rs 50,000 in case of senior citizens) is liable for TDS.

Return on investing in gold: Gold investment is based on an investment in a commodity. The investment bears the fluctuations in the market price of gold which is influenced by international and domestic factors. Global trade relations, geopolitical tensions, financial markets are among the few international factors influencing the price of gold. The domestic price of gold largely mirrors the international price subject to factors such as import policy on gold or domestic demand.

The returns on gold get taxed as capital gains. Various investments such as physical gold, coins, jewellery, gold ETFs, digital gold get taxed at the time of sale of the investment. The capital gains are long-term on the sale of the gold investments after three years. The long-term capital gains get the benefit of indexation and gains are taxable at 20% (plus applicable surcharge and cess). In case the gold investments are sold after a holding period of three years or less, the short-term gains get taxed as per the slab rates.

In case of investment in Sovereign gold bonds, the maturity proceeds received at the end of 8 years are exempt from capital gains tax. The interest income on the Sovereign gold bonds is taxable as per the income slab rate.

(The writer is Founder and CEO - ClearTax)