Gold has always been a popular way for Indians to save and invest their hard-earned money. Be it in the form of jewellery or bars and coins, gold is seen as a secure and trusted asset. However, times may come when one needs access to cash in a hurry. That's when gold becomes liquid and can be used to raise funds. The major options available are taking a gold loan or selling the gold. Both have advantages and disadvantages. In this article, we will explore the key factors to consider when choosing between the two.
Purity testing and valuation
Purity testing and valuation is one of the most important steps when deciding whether to pledge your gold as collateral for a loan or sell it outright. No lender or buyer will provide you with funds without first accurately determining the quality and quantity of gold you are offering. They need reliable figures for purity and weight to calculate the transaction value appropriately.
For gold loans, the assessed purity percentage is crucial as it directly impacts the maximum loan amount you will be eligible for. The higher the purity, the larger the loan value sanctioned against the same weight of gold. On the other hand, for those selling their gold, the purity testing governs the base price per gram that buyers will offer. Lower-purity gold is naturally discounted more during the sales.
It is therefore highly recommended to get your gold items tested by a reputed assayer or hallmarking center prior to pledging or selling. Look for ones accredited by the Bureau of Indian Standards (BIS) to ensure the accuracy and legitimacy of testing methods. A professional assayer will use advanced analytical techniques like X-ray fluorescence to precisely determine the percentage of pure gold in your jewellery after stripping off any other metals.
Loan amount and interest
One of the key factors to consider when choosing between a gold loan near me and selling is the amount that can be raised and the associated interest costs. Gold loans typically allow borrowers to avail of funds up to 70-75% of the market value of gold pledged as collateral. This loan-to-value ratio ensures adequate security for the lender. For example, if the current market price of gold is ₹50,000 per 10 grams, pledging 20 grams can fetch a loan of around ₹70,000 to ₹75,000. This loan amount is credited almost instantly to the borrower's bank account on approval of the loan application. Such quick access to a sizable sum makes gold loans attractive in times of urgent cash needs.
However, this flexibility comes at the cost of paying interest on the loan amount till full repayment. Interest rates for gold loans in India usually range from 15-24% per annum, compounded monthly. For a ₹70,000 loan taken for 1 year, the interest cost would be around ₹10,500-₹16,800. This interest is deductible under Section 80C for tax benefits but still adds to the overall cost.
On the other hand, outright selling of gold fetches immediate cash equal to the exact market value of gold less brokerage charges and making/wastage costs deducted by the buyer. There is no scope to negotiate these deductions which may amount to 2-5% typically. However, the big advantage is that no interest is payable on the sale amount received. The seller simply walks away with cash in hand without any obligation to repay a loan.
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Updated: Nov 8, 2023
Tenure
Tenure is an important factor to consider when deciding between a gold loan or selling the gold. However, loan against gold from banks and NBFCs come with a fixed repayment period or tenure, usually in the range of 3 to 36 months. This time period is decided upfront at the time of sanctioning the loan. The borrower needs to repay the full loan amount along with applicable interest charges by the due date stipulated. Failing to do so can have consequences.
Most lenders impose penalties for delayed repayment beyond the due date. This could be in the form of additional interest charges for the overdue period. In some cases, lenders may even invoke the loan agreement clauses to take possession of the gold pledged as collateral. This would mean the borrower loses ownership rights over their gold. Hence, it is crucial to repay the loan on time before the pre-set tenure ends.
When selling gold, there is no fixed tenure involved. The transaction is completed immediately with full payment to the seller based on the market value determined by purity testing. From the seller's perspective, there are no obligations to repay anything back to the buyer in the future dates. The gold is permanently sold off to the buyer, and the ownership rights are transferred.
Ownership
Ownership is a major differentiating factor between taking a gold loan and outright selling. When opting for a loan, the borrower retains legal ownership over the gold assets that are pledged as security. Only the physical possession shifts to the lender in the form of a bank or NBFC. The gold ornaments and coins are kept in safe custody with the lender until the loan is repaid in full.
This sense of continued ownership gives borrowers comfort that, come what may, the gold pledged is still their property. Even if the market value increases significantly during the loan tenure, they stand to benefit from this appreciation. As long as all interests and principals are cleared as per schedule, the borrower can walk away with the same gold items. In case the loan gets closed before the agreed tenure, the borrower can redeem the pledged gold by paying only the outstanding dues.
However, when selling the gold assets, there is a complete transfer of ownership to the new buyer. The seller relinquishes all rights over and claims to the gold pieces once the transaction is complete and payment is received. They can no longer enjoy any future upsides in gold prices nor demand return of the same ornaments. The gold is now legally owned solely by the purchaser who bought it at the agreed market price. The seller severs all ties to the gold sold, and it ceases to remain their property from then on.
Liquidity
Liquidity is one of the key factors to consider while deciding between a gold loan or selling gold. With a gold loan, borrowers can access funds very quickly by simply pledging their gold ornaments at a bank or NBFC. All they need to do is submit the required documents and complete basic verification. Within a day or two, the loan amount is credited to their bank account. This provides instant liquidity without much hassle.
On the other hand, selling gold can be a more time-consuming process. First, reliable buyers who offer fair market prices need to be identified. This may require asking around or searching online platforms. Then, the purity and quality of gold items have to be assessed either through home testing kits or by visiting stores. Only after negotiations and getting the best offer letter in hand, the transaction is completed. This process of finding the right buyer and getting the best possible price may stretch over a few days.
However, the advantage of selling is that it provides instant cash in hand without any obligation of future repayment. Gold loans, on the other hand, come with interest costs that accumulate over the repayment period. So, while loans offer faster liquidity, selling eliminates future repayment responsibilities against immediate cash in hand. Both options have their relative benefits depending on individual needs and preferences.
Taxation
Taxation is an important factor to consider when deciding between a gold loan or selling gold assets. Interest paid on gold loans is eligible for tax deduction under Section 80C of the Income Tax Act, providing significant tax benefits. Section 80C allows an individual taxpayer to deduct up to Rs. 1.5 lakh from their gross total income towards eligible investments and expenditures. Interest payments on a gold loan fall under this category. The deduction helps reduce the tax liability for the financial year.
Importantly, there is no tax payable on the principal amount borrowed from the gold loan. Only the interest component, after deduction, is taxed as part of the total income. In the case of selling gold assets, capital gains tax as per the applicable tax slab rate may have to be paid on any profits made. If the gold was held for over 36 months prior to sale, indexation of the purchase cost is allowed to factor in inflation and arrive at the actual capital gains amount. This reduces the tax outgo.
However, for gold assets sold within 36 months of purchase, an indexation benefit is not available. The full profits or capital gains amount attracts tax as per the applicable tax slab. For individuals in the highest 30% slab, this can amount to a substantial tax outgo. Further, in case the capital gains amount exceeds Rs. 1 lakh after indexation, an additional cess of 4% of the tax payable is levied. This long-term capital gains tax of up to 34.32%, including cess, is significantly higher than the interest cost post deduction on a gold loan within similar holding periods.
Future appreciation
The possibility of future appreciation in gold prices is another important factor to consider. By opting for a gold loan instead of selling, the borrower retains legal ownership and possession of the underlying gold assets that were pledged as collateral. If the price of gold increases substantially from the current levels in the future, the owner stands to benefit financially at the time of loan repayment.
The value of gold collateral will have risen, allowing settlement of the loan at a lower quantity of gold. Any upside in market prices accrues to the borrower. However, with the outright selling of gold, its future ownership and upside potential are permanently forfeited. The seller loses any opportunity to profit from a rise in gold rates as an investment in the years ahead. Though the immediate cash received through sale has no obligation of future repayment, this comes at the cost of foregoing potential appreciation.
Sentimental value
Many gold pieces that people own hold immense sentimental significance due to special memories and occasions in their lives. It may be ancestral jewellery passed down for generations or items received as gifts for milestones like a wedding or religious ceremonies. The emotional attachment to such jewellery runs deep. Selling off sentimentally valuable gold can, therefore, cause considerable emotional stress and sadness. Parting with family heirlooms that remind us of past loved ones can leave a void difficult to fill.
Emergency needs
In times of urgent financial requirements such as medical emergencies, debt obligations or other unexpected expenses, gold loans can be a lifesaver. They allow accessing cash much faster than arranging for the sale of gold assets. The loan approval and disbursal is a streamlined process for recognized lenders, often enabling funds in your bank account on the same day of application. However, selling gold may take longer as you will need to find reliable buyers willing to offer a fair price in the current market scenario. The transaction also involves more paperwork.
Liquidity needs
If funds are needed very temporarily for a month or two, gold loans serve the purpose better than selling the asset. The ownership is retained, and the loan can be repaid quickly without interest for a long duration. Selling is preferable for longer-term or permanent cash needs.
Risk of theft or loss
With loans, gold remains in bank/NBFC custody as security. The risk of theft or loss is much lower compared to keeping physical gold at home/office. In case of a loss, insurance coverage may be available. With selling, cash is safely received with no further risks.
Conclusion
Both gold loans and selling gold coins for cash have their place depending on individual needs and risk appetite. Loans are preferable for short-term or urgent needs where ownership is important. Selling works better for long-term or permanent cash requirements without obligations. Overall, taking everything into account, one must evaluate one's unique situation and choose the better option based on factors like tenure, tax benefits, ownership needs, risk profile, and future plans. An informed decision balancing pros and cons will help maximise benefits.