Halal Ways of Investment in Gold: Coin, ETF, Bonds or Futures ?

Halal Gold Investments

Gold in undoubtedly one of the best investment options for Muslims. However, there are at least several different ways I can think of investing in gold.
Let us discuss each of them so that we know the halal from the haram.

Only option #1 and #2 are permitted, so we will discuss them first.

1. Jewellery

Probably the most common and unintentional investment that people have been making since ages. Actually given the attachment of most women to gold, I think this is probably never an investment since it can never be sold. It can at max be converted from one ornament to another.
As an investment this is a very bad option. Jewelers in India adopt several unfair practices in selling jewellery all of which result in you losing out:

• When you're buying there can be some short measure in weight of gold. Most common way is presence of artificial diamonds and stones.
• Jeweler will take making charges which are huge 10-30% of the value. So even if your gold appreciates by 20%, you earn nothing.
• While selling also there will be some short charge and you will be at loss.
• In the name of Hallmark certified jewellery, you will be charged more than normal.
• Ordinarily too you might never get jewellery at market rate.
• You can be deceived as to whether its 22 carat or 20 carat.

However this is a halal mean so you should use it.

2. Pure Gold (coins/ biscuits)

Best way for investment purpose. No problems related to rates/ purity/ weight or any other charges. No issues in selling either since buying/ selling is at near market rate. And good thing is it can be purchased quite easily. I think banks charge a little more so better to buy from jewellers itself.


 

Non-Halal Gold Investments

Now these two are the only legal ones. And these are probably the best too...even though hundreds of blogs and articles will say otherwise. Those newspaper articles and blogs are more of an advertisement front for the gold investment companies to earn money.
Disadvantages:

• Tax deduction: All below schemes will deduct tax on profit earned at rate of 20%.
• All below will cut something like 2% to 5% owing to maintenance fees or administrative charge or something else. Some of it will be recurring.
• They are illegal according to Islamic rules.

Why they are not legal: It is because of one simple aspect that by Islamic law, we have to take the possession of goods once we have paid for it - gold in this case. While the whole point of these things is mostly not keeping physical gold. In most of below schemes there is no such arrangement. And even if the arrangement exists it is either namesake or after a long duration. Hence forbidden.

3. Gold ETF (Exchange Traded Funds)

They are a way to invest in gold storing them in electronic form with the ease of the stock market. Means they are financial products which invest entirely in physical gold. Investors having demat account can buy and sell them similar to any other stocks on the exchange. You cannot get physical gold for the stock even though the company is buying it. All major MF players will have one.
 

4. Gold Mutual Fund

There are no pure Gold Mutual Funds in India, we only have the variants as mentioned in points #5 and #6.

5. Gold Saving Fund (Fund of Funds) 

They are mutual funds that invest almost entirely in Gold ETF. They are worst off then gold ETF due to additional charges for managing it. Only thing is you can invest without demat. All major MF players will have one fund which will be linked to their own ETF.

6. International Commodities Sectoral Funds 

They are mutual funds that invest overseas in gold and in shares of gold mining/ trading companies. Mostly they invest in gold related companies rather than in gold.

7. eGold

e-Gold was launched from the exchange NSEL Its very much like Gold ETF , where you can invest in Gold in online format. For investing in E-Gold you still need a demat account with one of the companies authorised by NSEL The difference from ETF is that you can also take physical delivery of gold with some terms and conditions. It is no longer available now since it was closed down due to some regulator issues.

8. Gold Futures (Commodities market)

This is an entirely betting market where you bet on the future price of a commodity right now. People may argue that futures are for hedging but that is theory...its 100% gambling.

9. Gold Investment/ Deposit Schemes

These are mostly started by jewelers in which you invest some fixed amount every month and after few years take physical delivery of the gold.
Some other financial companies also offer similar schemes.

10. Gold Government Bonds

These are similar to gold funds but better in the sense they are from a more secure institution plus these funds also give interest. So what you earn is the price of gold and the interest fixed by government. However, these are yet to be launched and details are awaited.

11. Gold Monetization Scheme

This is also a scheme soon to be launched by the government. It is exactly similar to Gold Deposit scheme with the difference that gold will be deposited with the banks and you will earn interest on it.

Halal Investments (Non-Tax Saving)

I have already discussed about Halal Tax Saving:

• Halal Tax Saving Investments 
• Halal Tax Saving Without Investments

Following investments are not related to tax saving but general investments I can think.
Please comment and add your suggestions so that I can update this blog article with your help.

1. Gold

Probably one of the easiest and safe investments. Steady increase in value and invest in small amounts.
Update: Added an article in detail.
Halal Ways to Invest in Gold

2. Real Estate

Now I am not talking about taking a house in a city. That is out of question for most of us who won't take loans. Am talking of taking in your native village. Cost of land/ shops/ houses has been rising all over India. So you could buy it in your village too as it will be affordable. Mind you that buy only in a place you are well known about and not some unknown place.

1. Agricultural/ Non-Agricultural land
2. Village House
3. Shop if major road passes through village.

3. Livestock

If you live in village and can get people for the same, having your own livestock can be a good investment.

4. Business of a trusted relative/ friend.

Probably the best way of investment. Note however the person should be a well-trusted and hard working one. And the share of business and terms be decided before hand.
If the business venture makes profit, you get your share. If it makes a loss, you do make a loss.
But this is undoubtedly the best way.

Halal Tax Saving by House Rent or HRA

There are certain legal conditions to be met before you can claim HRA deduction/ exemption. I have tried to make it as simple as possible.

But first discuss housing aspect:

1. You or your spouse or your minor child do not own a house. Even if your parents own a house, HRA can be claimed by giving them the rent and which will be part of parent’s income.
2. You own a house in one place and do not live there but live in a different place.
3. You have bought a house but have no possession yet.
4. You have rent receipts or legal agreement for the same.

I have not included home loan conditions above, since I assume a Muslim won’t be taking one.

For HRA to work there are 2 options:

     A.      You receive HRA component in your salary: Section 10 (13A) exemption

     B.      Your don’t receive HRA component or are self-employed: Section 80GG deduction

You can use either of these options, not both.

Basic Definitions used in calculations

Financial Year: A year starting from April 1 of one year and ending at March 31 of next year.

Basic Salary:      Basic component + any Dearness Allowance + any Fixed Commission

Total Income:   Entire amount earned during year minus all tax deductions and exemptions. Amount earned need not be just salary. But any additional perks or income from other sources or financial instruments. Basically just about anything that contributes wealth to your kitty. All tax deductions and tax saving exemptions need to be subtracted except the Section 80GG one for rent.

Section 10 (13A): HRA component in salary.

This is simple enough and is discussed on several sites. The amount of exemption available for a financial year is minimum of the following:

1.       HRA received in salary.

2.       Rent paid minus 10% of Basic Salary.

3.       50% of Basic Salary received for Mumbai, Delhi, Chennai, Kolkata or 40% of Basic for other places.

Section 80GG: No HRA component.

This is minimum of the following for a financial year:

1.       Rs. 24000 (in case deduction is for less than a year, calculate at Rs. 2000 per month).

2.       Rent paid minus 10% of Total Income.

3.       25% of Total Income.

Also in this case an additional Form 10BA has to be furnished. Note here for almost everyone the amount comes to first option only because nowadays, anyone would be a paying a rent of more than Rs. 2000 per month.

Example:

A person living in Delhi receives following:

Basic Salary:      Rs. 10,000 p.m. = Rs. 120,000 p.a.

Total Income:      Rs. 30,000 p.m. = Rs. 360,000 p.a.

Rent Paid:          Rs.   7,000 p.m. = Rs.   84,000 p.a.

If case is of employee getting HRA as part of Total Income,

HRA Received:    Rs.   4,000 p.m. = Rs.  48,000 p.a.

So Section 10 exemption will be minimum of:

1.       HRA received = Rs. 48,000

2.       Rent paid (Rs. 84,000) minus 10% of Basic (Rs. 12,000) = Rs. 72,000

3.       50% of Basic = Rs. 60,000

i.e. Rs. 48,000

In case no HRA, calculation as per Section 80GG:

1.       Rs. 24,000

2.       Rent paid (Rs. 84,000) minus 10% of Total (Rs. 36,000) = Rs. 48,000

3.       25% of Total = Rs. 120,000

So here minimum is Rs. 24,000

Hence note that receiving HRA in salary is always better since using Section 80GG only rent up to Rs. 2000 per month is covered which is extremely less amount.