Gold has always lived up to its reputation of being a safe haven, and to build financial security through the years. It is one of the best performing classes and has delivered an average return of 11% CAGR in the last 25 years. This shows that in times of uncertainty, gold has provided positive returns during falling equity markets, depreciating currency, geopolitical uncertainties, to name a few.
There are many ways you can buy gold in India, and here are the popular ones.
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An Overview of Digital Gold and Physical Gold in India
Here’s a quick overview of buying digital gold and physical gold in India.
Physical Gold
Physical gold can be purchased at jewelry shops and includes a 20% making charge, 3% GST, and capital gains tax is charged when selling the yellow metal. Consumers can also buy gold bars and coins via bullion traders or government-backed institutions such as the MMTC. Physical gold carries BIS hallmarking that guarantees the purity and fineness of gold.
Related: Investors Guide To Buying Gold In India
Digital Gold
Buying digital gold involves investing in exchange traded funds (ETFs), gold mutual funds, and gold futures. Here’s a brief discussion on these investment options, as follows:
Sovereign gold bonds (SGBs)
The Reserve Bank of India (RBI) issues SGBs on behalf of the Indian Government every financial year, and are made available for purchase at authorized banks, post offices, brokerage firms, and online platforms. The investment in SGB requires you to purchase a minimum of one unit of gold that equals one gram of gold.
Remember, investors are guaranteed a 2.50% fixed interest rate per annum on maturity, with tenure of up to eight years, and redemption is allowed only after five years. Like Gold exchange traded funds (ETFs), sovereign gold bonds are redeemed in cash on maturity.
Related: How To Invest In Sovereign Gold Bonds
Gold exchange traded funds (ETFs)
Gold ETFs are bought and sold, or traded at stock exchanges of India. When you invest in a gold ETF, you don’t hold physical gold but the cash equivalent to the value of yellow metal in the market. This means that you don’t receive solid gold when you decide to sell it. Also known as paper gold, Gold ETFs eradicate the necessity of storage and making charges, unlike purchasing gold jewelry.
Gold ETF is also considered as a safe haven to balance the exposure of your portfolio when the value of currency goes down. It requires a demat account to purchase gold trading is done by choosing a preferred brokerage firm, and requires a demat account.
Related: How To Invest In Gold ETFs
Digital Gold vs Physical Gold
Detailed Comparison: Physical Gold vs Digital Gold
Jewelers are the first point of contact to buy physical gold, whereas gold bars and coins can also be purchased via bullion traders or government-backed institutions such as the MMTC. Unlike jewelry, SGBs can be bought only at different tranches when the RBI makes them available for consumers to buy at authorized banks, post offices, and online platforms. ETFs, on the other hand, can be bought anytime at stock exchanges via stockbrokers.
As far as the cost of buying SGB, the value of one unit of SGB equals one gram of physical gold. Individuals and Hindu Undivided Family (HUF) are allowed to subscribe up to 4 kgs of gold, while trusts can subscribe up to 20 kgs. To start trading in ETFs, a minimum of one unit of gold ETF is bought through authorized brokerage firms. The price of gold jewelry is calculated as per the current gold rate, and varies among states. Usually, a 20% making charge is levied when buying gold jewelry.
SGBs and ETFs do not require storage unlike gold jewelry, bars, and coins. You need to have a demat account to keep track of your investment. Investment in ETFs is similar to investing in mutual funds, you need to have a demat account to start trading in gold ETF. Whereas, gold jewelry, bars, and coins can be stored at home, or in safe deposit boxes at your local bank paying a certain cost.
Investments in SGBs have a lock-in period of up to eight years, but can be redeemed in five years. Besides capital appreciation, investors earn 2.5% rate of interest as returns on maturity, however, you don’t get physical gold in return. On the contrary, ETFs do not have a lock-in period. But like mutual funds, investors can buy ETFs at any point in time through authorized brokerage firms, and upon selling the value is based on the closing price of the holding ETF. There is also a procedure to convert your ETF to physical gold. Gold jewelry is highly liquid, or can be sold in the market at any time, and returns are calculated as per change in the gold price.
It is important to remember that profits earned from SGBs are taxable; however, capital gains are exempt from taxation on maturity. In terms of gold ETF, profits aren’t taxable, but capital gains tax is levied upon selling the ETFs. Investors in physical gold, on the other hand, will pay 3% GST when buying gold jewelry, bars, and coins—and, capital gains tax is charged when selling the yellow metal.
SGBs, ETfs, and physical gold can be kept as collateral to obtain loans from banks. Banks offer a minimum of INR 20,000 and maximum up to INR 20 lakh loan against your SGB holding, depending on the tenure and nature of the loan, either overdraft or demand loan. In order to get a loan against ETFs, you need to convert your holdings into physical gold, and based on the value you are offered a loan. Banks offer investors up to 75% loan-to-value against the pledge of gold jewelry, bars, and coins as security.
Frequently Asked Questions (FAQs)
Where can I buy gold SGBs and ETFs in India?
The Reserve Bank of India issues SGBs via authorized institutions every financial year in different tranches. Gold ETFs, on the other hand, are traded or bought and sold in Indian stock exchanges and are similar to investment in mutual funds.
Do I need a demat account to invest in gold SGBs and ETFs?
Yes, you need to have a demat account to keep track of your investment in sovereign gold bonds (SGBs) and gold exchange-traded funds (ETFs).
How much return will I get in investing in gold SGB, ETF, and jewelry?
Upon maturity of SGBs, you earn 2.5% returns plus capital appreciation. Like mutual funds, the value of your investment on ETFs is based on the closing price of the holding ETF. Returns on physical jewelry, on the other hand, are calculated as per changes in the gold price.
Are there any taxes included while purchasing gold SGBs, ETFs, or jewelry?
Profits earned from SGBs are taxable, but capital gains are exempt from taxation on maturity. In terms of gold ETF, profits aren’t taxable, but capital gains tax is levied upon selling the ETFs. Physical gold, on the other hand, charges 3% of GST while buying gold jewelry, bars, and coins—and, capital gains tax is charged when selling the yellow metal.
