Gold has always been a valuable asset in India, serving not only as a form of jewellery but also as a financial safety net. One of the most common ways to leverage the value of gold is through a gold loan. If you’re wondering, “how does a gold loan work?” This blog will take you through the basics, methods, values, and drawbacks of gold loans, as well as discuss whether you can show a gold loan in income tax.

What is a gold loan?

A gold loan is a secured loan where you pledge your gold ornaments or coins as collateral to a bank or a financial institution. In return, you receive a loan amount based on the value of the gold. This type of loan is a quick and easy way to meet urgent financial needs, whether it’s for medical emergencies, education, or any other personal requirement.

How does gold loan work?

 The application process:

  1. Eligibility Check: To be eligible for a gold loan, you must be at least 18 years old and own gold that is between 18 to 24 karats. The gold can be in the form of jewellery or coins. 
  2. Documentation: You need to submit basic documents such as proof of identity (Aadhaar card, passport, voter ID) and proof of address (utility bills, rent agreement). Some lenders may also ask for proof of income, but it’s not always mandatory.
  3. Valuation of Gold: Once you submit your gold, the lender assesses its purity and weight to determine its market value. This valuation is crucial because the loan amount is typically a percentage of the gold’s value, usually between 75% to 90%.
  4. Loan Approval: After the valuation, the loan is approved, and the amount is disbursed either as a direct bank transfer or cash. This process can take as little as a few hours to a couple of days.

 Repayment

Gold loans come with flexible repayment options. You can choose to pay interest periodically and repay the principal at the end of the tenure or opt for regular EMI payments that cover both principal and interest. If you fail to repay the loan, the lender has the right to sell your gold to recover the outstanding amount.

 Interest Rates

Interest rates on gold loans are generally lower than unsecured loans like personal loans. The rates can range from 7% to 15% per annum, depending on the lender and the loan tenure.

Factors affecting the loan value

  1. Purity of Gold: Higher purity gold (22 to 24 karats) will fetch a higher loan amount compared to lower purity gold.
  2. Market Price: The loan amount also depends on the current market price of gold. If gold prices are high, you can get a higher loan amount for the same weight.
  3. Lender Policies: Different lenders have different policies regarding the loan-to-value ratio. It’s wise to compare various lenders to get the best deal.

Can we show a gold loan in income tax?

When it comes to income tax, the treatment of a loan depends on the purpose for which the is used. 

 Claiming Interest Paid

If you use the loan for business purposes, the interest paid on the loan can be claimed as a business expense, thereby reducing your taxable income. To claim this, you need to maintain proper documentation, including the loan agreement and interest payment receipts.

 Personal Use

If the loan is used for personal reasons, such as education or medical expenses, the interest paid cannot be claimed as a deduction in your income tax return. However, it’s always advisable to consult a tax professional to understand the specific tax implications in your case.

Gold loans are a convenient and quick way to access funds by leveraging your gold assets. They offer several benefits, including lower interest rates, flexible repayment options, and quick processing times. However, it’s essential to consider the risks, such as the potential loss of your gold and the associated costs. By understanding how does gold loan work and comparing different lenders, you can make an informed decision that best suits your financial needs. And remember, while gold loans can provide immediate relief, it’s crucial to have a repayment plan in place to avoid any financial distress in the future.