Nowadays, there are many options available for you to invest in Gold. But each way has its own Advantages and Disadvantages. In some ways, you might be able to generate a handsome return, and for some, there is constant liquidity in the market. But in this Gold Investment Guide, we are going to clear once and for all – Which is the Best Way to Invest in Gold?
Before we start this comparison of which is the best way to buy Gold, we should say that Gold as an asset class should only be looked at after you have diversified your portfolio into other asset classes such as Equity, Debt, Real Estate, Fixed Income, etc.
- Why Should You Invest in Gold?
- In How Many Ways You Can Invest in Gold?
- Physical Gold
- Digital Gold
- Gold ETF
- Gold Mutual Fund
- Sovereign Gold Bond
- Tax Implications of Investing in Gold
- Which is the Best Way to Invest in Gold in India?
Why Should You Invest in Gold?
Technically buying gold is not an investment. Investors buy gold to ‘hedge’ or protect their investments during tough times. Typically, the Gold and the Equity market is inversely related. That means, that when the Equity market goes down, the price of gold goes up and vice versa.
Allocating a certain percentage of your portfolio to gold stabilizes your portfolio during uncertain times.
A perfect example of such a scenario would be, during the time of the 2020 pandemic. The equity market crashed while Gold was making lifetime highs, each new day.
As the legendary investor of our time, Mr Warren Buffet said, invest in assets that produce a positive cash flow and not in ‘assets’, which sit in the corner and shine.
In other words, Mr Buffet is asking people to invest in assets that add value to the world.
Farmland will produce crops that the owner can sell and earn a profit, and it doesn’t matter what the next-door neighbour is biding for that piece of land.
If the price of farmlands starts moving southwards tomorrow, it doesn’t matter to the owner. Because he will still have a positive cash flow in the form of crop sales.
But if he had just bought the fertile land and kept it hoping someone will bid a higher price tomorrow, then the story would have been different.
People buy Gold because the yellow metal is a scarce product, and they are betting that someday, someone, is going to bid a higher price than what he/she paid for.
You should invest in Gold, not just to earn a profit, but to protect your portfolio during tough times. Gold also lowers the volatility index of your portfolio, thus protecting it from the risk of high volatility.
In a recent interview given to CNBC, Howard Marks, the Chairman of Oaktree Capital explained why he doesn’t like investing in Gold.
In How Many Ways You Can Invest in Gold?
There are mainly 5 Ways, through which you can invest in Gold.
- Physical Gold
- Digital Gold
- Gold ETFs
- Gold Mutual Funds
- Sovereign Gold Bond
Each way has its own Pros and Cons.
We will discuss all of the Five Ways of Investing in Gold in detail, in this article.
Let us start with –
Physical Gold can be bought in two ways. One way is to buy the Gold in the form of Jewellery, and the other way is to buy the Gold in the form of Bullion (Gold Biscuit or Gold Brick) or Coins.
Gold in the form of jewellery is not the ideal way to invest in gold. Gold in the form of jewellery is mostly bought for consumption and rarely for investing in gold.
Gold Jewellery if viewed from a point of investment, has many negative points.
Disadvantages of Gold Jewellery
- Design and Making Charges, Tax and Store Profit – The buyer has to bear the Design and Making Charges.
So if you are intending to invest in Physical Gold in the form of Gold Jewellery, you must be ready to cut away some of the returns, in the form of Design and Making Charges.
And after the Design and Making Charges have taken a cut from your returns, tax in the form of GST will take another 3% cut.
And a store that sells any product, obviously has its profit included in the MRP, so the Jewellery Store’s Profit will take another cut from your returns.
- Storage Risk and Cost – No matter how strong the security measurements are, there is always the risk of theft involved, when storing gold in the form of jewellery.
And bank locker has annual charges, which will again claw down the return’s percentage.
- Impurity – To make jewellery out of gold, you have to mix other metals such as Silver or Copper to strengthen the gold.
And if the Gold Jewellery is bought from a substandard store, then you have no idea how much impurities are mixed in it.
- Returns – Design and Making Charges take away a major portion of the returns.
And if you are renting a bank locker to store your Gold Jewellery, annual renting charges take away another piece of the pie.
In the end, you end up with lower returns than what you expected. And gold in the form of jewellery doesn’t earn any interest income.
While some ways do provide a positive cash flow to the investor, which we will talk about in this article.
- The Barrier to Entry – As investment grade 24 Carat Gold Jewellery is quite expensive, the barrier to entry for investing in Physical Gold through Gold Jewellery becomes very high.
And as you have to pay the lump sum amount upfront when buying the jewellery, so this way of investing in Physical Gold becomes difficult for some people.
- Liquidity – Liquidity is a serious issue when it comes to Gold Jewellery. You cannot liquidate your gold the moment you want your money back.
You have to visit different jewellery stores to see whether they will buy back your jewellery.
And in case you have lost your Gold Jewellery receipt, most of the stores will not even entertain you.
Can I Apply for a Loan against Gold Jewellery?
If you think that you might want to avail a loan by pledging your Gold Jewellery (also known as Gold Loans) from a bank, in the future, then according to RBI’s new rule, you can avail a loan equivalent to 90% of the Jewellery’s value.
You can avail Gold Loans from different Banks and NBFCs. Though each lender has its own range, Muthoot Fincorp provides loan as low as one thousand rupees.
After looking at all the negative points of Gold Jewellery, we can say that investing in gold as an Asset Class in the form of jewellery, is not ideal.
Owning assets brings you money, while Gold Jewellery in some case is taking away money from you in the form of tax and annual locker rent. Gold Jewellery is looking more and more like a liability, than an asset.
How to Buy Gold Jewellery in India?
So the best way to invest in Physical Gold is through Gold Bullion or Gold Coins. Let’s talk about that.
Gold Bullion and Gold Coins
If you invest in Physical Gold either through Gold Bullion (Gold Biscuits or Gold Bricks) or Gold Coins, many charges and taxes go away.
For example, there is no Design and Making Charges for Gold Bullion or Coins. And you don’t have to pay any Goods and Services Tax or GST over those charges.
When you are investing in Physical Gold via Gold Bullion or Gold Coins, the question of impurities do not arise, as Gold Bullion or Coins are made of 24 Carat Gold.
Though, the risk of theft remains with Gold in the form of Bullion or Coins. And if you are considering a bank locker to store the Bullion or Coins, the annual renting charges will take a few percentages out of your returns.
The barrier to entry is also high in the case of Gold Bullion or Coins. You have to buy a minimum of 1 Gram of 24 Carat Gold if you are investing in gold in the form of Bullion or Coins.
0.25 Gram or 0.50 Gram of Gold Bullion or Coins are hard to find from reputed brands. And most of the times, the price of such a small amount of gold doesn’t justify, the minting cost of Gold Bullion and Gold Coins.
The liquidity issue with Physical Gold persists even with Gold Bullion and Coins. You have to visit physical stores in order to sell your Bullion or Gold. It is not easy to convert your Physical Gold of any kind, into liquid cash.
Can I Apply for a Loan against Gold Bullion or Gold Coins?
If you think that you will be applying for a Gold Loan by pledging your Gold Bullion or Coins in the future, then there are a few points you need to remember.
Points to Remember When Applying for Gold Loan against Bullion or Coins.
- RBI has issued a policy which doesn’t allow Banks or NBFCs to disburse loan against Gold Bullion. That means you cannot apply for a Gold Loan pledging your Gold Biscuits or Gold Bricks.
- You can apply for a loan pledging your Gold Coins. But the Gold Coins must be 99.99% Pure 24 Carat Gold, and the Gold Coins must be below 50 Grams in weight.
You can read more about Rules of Gold Loans here.
How to Buy Gold Bullion or Gold Coins in India?
You can buy Gold Coins and Bullion from your local jewellery store, or you can visit your local bank branch. Or you can visit e-stores of big, reputed brands like Tanishq or Mia to buy Gold Coins, Gold Biscuits and Gold Bars, online.
To solve some of the problems faced by investors while investing in Gold via Physical Gold, came Digital Gold.
What is Digital Gold?
To make it easy to understand –
Digital Gold was introduced so that retail investors can cost-effectively get exposure to gold, but without the inconveniences of owning Physical Gold. The Unique Selling Point of Digital Gold as a product is, it allows investors to buy gold with as low as Re. 1/-. Digital Gold democratized investing in gold.
Digital Gold, as the name states, is bought and sold over a Digital Platform. Digital Gold solved multiple issues that Physical Gold had, like –
Pros and Cons of Digital Gold
- Design and Making Charges – Unlike Gold Jewellery, you don’t have you pay any Design and Making Charges when you invest in Gold via Digital Gold.
Unless you are taking delivery of your gold, in which case, you have to pay the Making Charge and the GST over it.
- Storage Risk and Cost – As you are not physically owning the Gold, the Storage Risk and Cost in the form of the annual renting charge of bank locker goes away.
Digital Gold that you buy is stored in insured vaults of brands like MMTC-PAMP, Augmont Gold, Safe Gold, etc.
But, you cannot keep your gold inside the vaults of these companies without any charge, forever.
After a certain period, you will need to take delivery of your Gold if you meet the minimum delivery criteria, or you can sell it at the market price.
Some brands do allow you to keep your Gold inside their insured locker, but they do charge an annual fee.
Some brands like MMTC-PAMP doesn’t have any storage charge for a period of time, whereas some brands like Safe Gold does have a storage charge, where they charge you a nominal charge of 0.03 to 0.04% after a certain period, for storing your Gold.
We discussed the safety and storage of Digital Gold in this article.
Still, we cannot say that Digital Gold has ZERO Storage Cost.
- Impurities – You won’t be able to question the purity of the gold, as you will be buying your Gold directly from some of the biggest Gold Mining and Refining Companies in India, like MMTC PAMP, Augmont Gold, etc.
Digital Gold bought from reputed platforms is certified from Bureau of Indian Standards or BIS.
- Returns – As a lot of charges are not applicable when it comes to Digital Gold, Digital Gold will definitely fetch you more returns when compared to Physical Gold. But the 3% GST while buying your Digital Gold will definitely take a piece of the pie.
- Barrier To Entry – This is the most important point where Digital Gold trumps Physical Gold.
You can buy Digital Gold with as low as Re. 1/-.
The introduction of Digital Gold made sure that, even the ‘not-so-fortunate’ people were also able to buy Gold.
Recently Digital Gold is making a lot of noise in the Indian Financial Market, and that is because of the massive retail investor’s participation Digital Gold got, thanks to Smartphone Apps like Paytm, PhonePe, Groww, etc.
- Liquidity – There is no liquidity issue when it comes to Digital Gold. To liquidate your Gold into cash, all you need to do is open the App or Website from where you bought the Gold and press SELL. That’s it. Liquidating your Digital Gold is that easy.
If you want, you can even take delivery of your Digital Gold in the form of Physical Gold. But to be eligible for delivery of your Digital Gold, you have to have a minimum of 0.5 Gram of Gold in your Digital Account, and in some cases, a minimum of 1 Gram of Gold.
How to Applying for a Loan by pledging Your Digital Gold?
Well, you will not be able to apply for a Gold Loan against your Digital Gold because the Gold that is stored inside the insured vault of the Mining and Refining Companies is in the form of Gold Bullion (Gold Biscuits and Bricks). And RBI doesn’t allow Banks or NBFCs to disburse loan against Gold Bullion.
How to Invest in Digital Gold in India?
There are multiple Smartphone Apps and their equivalent Websites that allow you to buy Digital Gold. You can buy Digital Gold with just Rs. 10/- through apps like Groww and with just Re. 1/- through Discount Brokers like Upstox.
So, in the end, we can see that Digital Gold solves a lot of the issues that Physical Gold had but still, we cannot say that Digital Gold is the best way to invest in gold, in India.
Now let us move on to the next Gold Investment Instrument and talk about Gold ETFs.
ETF as we all know stands for Exchange Traded Fund. ETFs are essentially Mutual Funds, but they are traded in Stock Exchanges like the NSE or the BSE. Just like stocks are traded in the Stock Market.
Most of the times, Gold ETFs track the Domestic Price of Gold. Gold ETFs invest most of their Asset Under Management or AUM in Gold, and a small amount of the AUM goes into super liquid assets like short term Government Treasury Bills, to maintain liquidity.
Some Gold ETFs do invest a portion of their AUM in companies that Mine and Refine Gold.
Though all the Gold ETFs ultimately invest their AUM in Gold, you cannot just a pick an ETF and go with it.
Expense Ratio plays a major factor in how much returns a particular ETF will generate. And for that, you need to have a basic understanding of Mutual Funds in order to select the right Gold ETF for yourself.
We have an in-depth article where we talked about how you can select the right fund for yourself. Read the article if you are planning to invest not only in Gold ETFs but also in any other kind of Mutual Funds.
Pros and Cons of Investing in Gold ETF
- Charges – A lot of the charges like Design and Making Charge, tax in the form of GST, Storage Charge, etc, that you had to pay to invest in Physical Gold, goes away when you invest in Gold via Gold ETFs.
The only charge you have to pay when investing in Gold via Gold ETFs is the Fund Management Charge, in the form of Expense Ratio.
Expense Ratio of Gold ETFs generally varies from 0.5 – 1%.
- Storage Risk and Cost – Storage Risk and Cost goes away too as you don’t need to physically store your Gold or rent a bank locker.
You can also take delivery of your Gold which you have bought via Gold ETFs.
But in order to take delivery of your gold in physical form, you need to have Gold ETF Units equivalent to at least 1 Kilogram of Gold.
- Impurities – According to the Association of Mutual Funds in India or AMFI, Gold ETFs invest in 99.5% pure Gold Bars.
So the doubt about impurities goes right out of the window. And if you don’t know what AMFI is and what its job is, then read this article where we discussed about AMFI and what it does.
- Returns – Gold ETFs will generate a higher return when compared to Physical Gold. Because unlike Physical Gold, Gold ETFs do not have unnecessary charges that are eating up your returns.
- Barrier To Entry – Just like any other Mutual Fund, Gold ETFs also have units which investors buy from the stock market.
And each of this ETF Unit is equivalent to 1 Gram of Gold. And investors have to buy at least 1 Unit of the ETF in order to invest in Gold via Gold ETF.
The cost of 1 Unit of Gold ETF will be similar to 1 Gram of Gold.
So the entry barrier is not as low as Digital Gold where you can buy Gold with a single rupee, and it is not as high as Physical Gold.
- Liquidity – As Gold ETFs are traded in the stock exchanges, Liquidity is quite high in case of Gold ETFs. You can redeem you Gold ETF Units and encash your Gold during live market hours in the stock market.
Sometimes, trading volume decreases due to different reasons. At such an occasion, you might face some hardship to liquidate your Gold ETF Units.
Can I Apply for a Loan Against Gold ETF?
Gold ETFs invest their AUM in Gold in the form of 99.5% Pure Gold Bars, and we know that RBI doesn’t allow banks and NBFCs to lend out money against Gold Bar. So, NO, you cannot apply for a loan pledging your Gold ETF Units.
How to Invest in Gold ETFs in India?
As we know that Gold ETF Units are traded in the stock market, so to invest in Gold via Gold ETFs, you need to have a Demat account with a stockbroker.
To facilitate you in buying Gold ETFs, stockbrokers charge a fee in the form of Brokerage. But you can buy Gold ETFs by paying a very minimal brokerage charge of Rs. 0.01/- (Yes, One Paisa), if you open a Demat Account with a Discount Broker like Upstox.
If you don’t know how to use Upstox, then we have a very in-depth article discussing every aspect of Upstox. And in that article, we have also discussed how you can buy stocks and ETFs through Upstox.
We have listed out the Top 5 Gold ETF in India. If you are thinking of investing in one, you may give it a read.
That was a lot you got to know about Gold ETFs, now let us discuss Gold Mutual Funds.
Gold Mutual Fund
Well, Mutual Fund as an Equity or Debt Investing Instrument is very interesting, but the same cannot be said about Gold Mutual Funds.
Gold Mutual Funds basically invest their AUM in Gold ETFs. Nothing more. Gold Mutual Fund buys ETF Units, most of the time, from the same AMC.
You can look at Gold Mutual Funds as a fund of funds, where a single mutual fund invests in other funds, and it doesn’t buy the securities directly. Here, Gold Mutual Funds doesn’t buy the Gold directly, but they invest in a fund (in this case – ETFs) who buys the gold directly.
If you invest in Gold via Gold Mutual Fund, then all you are doing is increasing your cost in the form of Expense Ratio.
The Mutual Fund which you are investing in is charging you, and you are also paying the Expense Ratio of the ETF indirectly. So you are paying two charges when you are investing in Gold Mutual Fund, which you could have avoided if you have invested directly into a Gold ETF.
The only two positive points of investing in Gold via Gold Mutual Funds is –
- You do not need any Demat Account to invest in Gold Mutual Fund. You can buy Direct Mutual Funds from smartphone apps like Groww, where the Expense Ratio is low compared to Regular Funds.
- Gold Mutual Funds also maintain their own liquidity by investing a small portion of their AUM in Government-backed Securities, so investors can redeem and liquidate their holdings anytime they want.
Should You Invest in Gold via Gold Mutual Fund?
You are paying two charges. One is directly from the Mutual Fund, in the form of Expense Ratio. And another one is the Expense Ratio of the ETF the Mutual Fund is investing in, indirectly. So, NO, we do not recommend investing in Gold via Gold Mutual Fund.
These charges will ultimately bring down the overall return you will generate investing in Gold.
Sovereign Gold Bond
Sovereign Gold Bond or SGB, in short, is issued by Reserve Bank of India or RBI, on behalf of Government of India. SGB is a kind bond, whose underlying asset is Gold.
Out of all the avenues through which you can invest in Gold in India, Sovereign Gold Bond is the unique one. SGB not only gives your portfolio the exposure to Gold, but it also creates a regular income stream for the investors.
So, even if the Gold price doesn’t appreciate during your investment tenure (such a scenario is super rare), Sovereign Gold Bond will provide you with a regular income stream in the form of “Semi-Annual Interest”.
Sometimes, Sovereign Gold Bond is also called Paper Gold. Because the Gold you are buying is in the form of a Government Certificate.
Pros and Cons of Sovereign Gold Bond
- Charges – There are ZERO charges involved when you invest in Gold via Sovereign Gold Bond. There is no Design and Making Charge, tax in the form of GST, etc.
- Storage Risk and Cost – As the Gold you are buying is in the form of either a Physical Paper Certificate or in the Digital form, there is no risk of asset loss when it comes to SGB.
And also, as there is no Physical Gold to be protected, you don’t have to bear the annual renting charge of a bank locker.
- Impurities – The Gold you are buying through Sovereign Gold Bond is 24 Carat Gold. And while redeeming your bond, the value of your bond will be calculated based on the ongoing price of 24 Carat Gold during redemption.
As SGB is issued by Reserve Bank of India, doubt about the purity of the Gold shouldn’t come to your mind.
- Returns – Sovereign Gold Bond will give you the highest return possible. You will enjoy a 2.5% Annual Interest given out semi-annually, over the capital appreciation of Gold.
No other means of Gold Investment provide both, a regular income stream and capital gains other than Sovereign Gold Bond.
- Barrier To Entry – Each Unit of SGB is equal to 1 Gram of 24 Carat Gold.
So the price of a single unit of SGB will be similar (but lower in some special scenario, which we will talk about later) to the domestic price of 1 Gram of 24 Carat Gold.
So in case of Sovereign Gold Bond, the entry barrier is not as low as Digital Gold, but it is also not as high as Physical Gold.
You have to buy a minimum of 1 Unit of SGB which will cost you similar to 1 Gram of 24 Carat Gold.
- Liquidity – Sovereign Gold Bond is not as liquid as Digital Gold, but RBI provides investors with 3 exit options on 3 different time frames, which no other means of Gold Investment does.
We can say SGB has moderate liquidity.
We will discuss how you can redeem your SGB Units, next.
How Much Interest Will I Earn from Investing in Sovereign Gold Bond?
Investors of Sovereign Gold Bond will earn an interest of 2.5%, annually. It will be paid to the investor on a semi-annual basis.
Let us understand this with an example –
If you have bought 1 Unit of SGB, for which you invested Rs. 5,000/-. Then, each year you will earn an interest of –
Rs. 5,000 x 2.5% = Rs. 125/-
But, you will get your interest in 2 parts. One half of the interest after the first six months and another half of the interest after another six months.
So in the above scenario, you will get Rs. 62.50/- after six months and another Rs. 62.50/- after another six months.
Can I Apply for a Loan Against Sovereign Gold Bond?
Yes, you can apply for a Gold Loan pledging your Sovereign Gold Bond. Reserve Bank of India has mandated banks, NBFCs or any other Financial Institution to disburse Gold Loan keeping SGB as collateral.
How to Redeem Your Sovereign Gold Bond?
RBI allows you to redeem your Sovereign Gold Bond Units in 3 different ways and at 3 different time frames.
Ways to Redeem Your Sovereign Gold Bond
- On Maturity – The maturity time frame of Sovereign Gold Bond is 8 Year. After 8 Years, RBI will redeem your bond, and your Gold will be liquidated based on the current price of Gold, at that time.
In the meantime, you are earning 2.5% interest on your investment each year, for 8 years.
- Exit Option at the End of the 5th Year – RBI gives you an exit option at the end of the 5th Year to redeem your Sovereign Gold Bonds.
- Secondary Market – If holding your investment in Gold for 5 Years is too long for you, then RBI gives you another option to redeem your SGB Units.
Sovereign Gold Bond are tradable in the stock market, and you can sell off your SGB units and encash your investment in the secondary market.
Tradeable date of each tranche or series is notified by RBI. But do remember, SGB Units that are digitally bought (i.e. units that are bought through your Demat account) can only be traded in the stock market.
You cannot trade Sovereign Gold Bond that is held as Physical Certificate.
In the website of Reserve Bank of India, you will get all the details regarding Sovereign Gold Bond, we ask you, to please go through it before investing in SGB.
How to Invest in Sovereign Gold Bond?
There are multiple ways, through which you can invest in Sovereign Gold Bond.
Investors can invest in Sovereign Gold Bond, offline, by visiting a physical branch of a bank. But if you invest in SGB through any Online Portal, then RBI gives you an extra Rs. 50/- discount on the price of the bond.
So we would recommend, that you invest in Sovereign Gold Bond via any Online method.
- Directly Through the Online Portal of the Bank – You can apply for Sovereign Gold Bond directly via online banking.
Whenever RBI announces a new tranche of SGB, you can apply for it via the online banking portal of your bank.
In this article, we have shown you how you can apply for Sovereign Gold Bond from the Online Banking Platform of State Bank of India.
- Buy Sovereign Gold Bond in the Secondary Market through a Stockbroker – You can use Discount Broker like Upstox to buy Sovereign Gold Bonds that are traded in the Stock Market.
In the search option of Upstox, write “SGB” and you will be presented with all tranches and series of Sovereign Gold Bond that are trading in the Stock Market at that moment.
You may find some tranches or series of SGB that are trading at a lower price than the current price of Gold in the market.
If you buy from the secondary market, at a lower price, then you are already in the Green.
- Apply for Sovereign Gold Bond Directly from Zerodha – You can apply for the latest series of Sovereign Gold Bond issued by RBI, directly from Zerodha.
But to apply for SGB from Zerodha, you need to have a Demat Account with Zerodha.
If you have a Demat Account, then visit zerodha.com/gold and then click on Invest. Fill in the Quantity of SGB Units you want to buy and then click on place order.
Do remember to keep sufficient money in your Zerodha account.
That is it, your SGB units will be allotted, on the allotment date.
Tax Implications of Investing in Gold
Taxes are part and parcel of our life.
As one of the founding fathers of the United States of America, Benjamin Franklin said –
Profits earned from investing in Gold through some ways are taxable, while others are not. Let us see, through which avenue if you invest in Gold, you do not have to pay any taxes.
Tax Implication on Profits Earned through Investing in Gold.
- Physical Gold – Whether be it Gold Jewellery, Bullion or Gold Coins, if the Gold is sold within 3 Years, a Short Term Capital Gains Tax is applicable to the profits earned.
The STCG tax rate will be according to your individual Income Tax Slab.
If it is sold after 3 years of purchasing, then a Long Term Capital Gains Tax of 20% is applicable after indexation.
In Equity, the calculation period of Short Term Capital Gains Tax ends and Long Term Capital Gain Tax starts, after just 1 Year of holding the asset.
In the case of Debt and Gold, the same period is stretched to 3 Years.
(Reason – Equity is much riskier, so investors might want to close their positions early. Whereas debt is less risky than equity, so investors can hold onto their assets longer.)
- Digital Gold – Tax calculation on the profits earned through investing in Gold via Digital Gold is the same as Physical Gold.
Investors need to pay an STCG Tax according to their individual tax slab on the profit earned if the Digital Gold is sold within 3 Years of purchasing.
And if the Digital Gold is sold after 3 Years of purchasing, then an LTCG Tax of 20% after indexation, applies to the profits earned.
- Gold ETF and Gold Mutual Fund – Tax calculation on profits earned through investing in Gold via Gold ETF and Gold Mutual Fund are the same as Physical Gold.
If the Gold ETF or the Gold Mutual Fund Unit is sold within 3 Years of purchasing, then a Short Term Capital Gains Tax according to the individual tax slab is applicable.
And if the Unit is sold after 3 Years of purchasing, then a Long Term Capital Gains Tax of 20% post indexation, applies to the profit.
- Sovereign Gold Bond – Interest Earned from investing in Sovereign Gold Bond is TAXABLE. And it is taxed, based on the individual Tax Slab rate.
A) If the SGB Unit is Redeemed on Maturity – If you redeem your Sovereign Gold Bond Unit after 8 Years, which is the maturity period, the Capital Gain is totally TAX-FREE. You do not have to pay any tax on capital gains.
B) If the SGB Unit is Redeemed at the End of the 5th Year – If you redeem your investment of SGB on the exit window provided by RBI at the end of the 5th Year, then the profits earned as capital gains is totally TAX-FREE.
C) If the SGB Unit is Sold at the Secondary Market – If you encash your Sovereign Gold Bond Unit in the Stock Market, then the profits earned in the form of capital gains is TAXABLE.
Which is the Best Way to Invest in Gold in India?
Finally, coming to the most important question you might have in your mind right now.
If you have read the whole article, then you might have guessed the answer. And if you have not read the whole article, then let us summarize a few points.
Comparing Physical Gold vs Digital Gold vs Gold ETF vs Gold Mutual Fund vs Sovereign Gold Bond
- Charges –
Physical Gold in both Jewellery and Bullion form has multiple charges, which will lower your expected returns.
Digital Gold, on the other hand, doesn’t have Design and Making Charges, but you have to pay tax in the form of GST if you invest in Gold via Digital Gold.
Extra Charge might come up if you want to take delivery of your Gold.
Gold ETFs might not have Design and Making Charges or tax in the form of GST, but you have to pay the management charge in the form Expense Ratio.
Gold Mutual Funds has even higher Expense Ratio compared to Gold ETFs. Because Gold Mutual Fund invests its AUM in a Gold ETF and you have to pay Expense Ratio of both the Mutual Fund and the ETF.
One is directly charged, while the other one is indirectly charged.
Investing in Gold via Sovereign Gold Bond doesn’t cost you any extra charge. Rather, if you invest in SGB through any Online Platform, RBI gives you an extra Rs. 50/- discount on the price of the Gold Bond.
- Storage Risk and Cost –
Physical Gold has an inherent Storage Risk associated with it.
And if you want to rent a bank locker to store your Physical Gold, it will cost you in the form of Annual Renting Charge.
Digital Gold might not have Storage Risk or Cost associated with it at the beginning. But after a certain period, you have to either sell of your Gold or take delivery, in which case, the Storage Risk and Cost of Physical Gold come in to play.
Both, Gold ETFs and Gold Mutual Funds don’t have any Storage Risk or Cost related issues.
Sovereign Gold Bond also do not have any Storage Risk or Cost associated with it.
The Risk of Theft might arise if you have invested in SGB via the physical mode, in which case, you now have a physical certificate to protect.
- Impurities –
The only time you might get an issue with the purity of your Gold is when you invest through Gold Jewellery.
Otherwise, if you invest through Digital Gold, Gold ETFs and Gold Mutual Funds and Sovereign Gold Bond, you will not have any issue with the purity of your Gold.
- Barrier To Entry –
While Physical Gold has the highest Barrier to Entry, you can start investing in Digital Gold with just Re. 1/-.
If you invest through either Gold ETF or Sovereign Gold Bond, then you have to buy a minimum of 1 Gram of Gold.
So the Barrier To Entry is nor as high as Physical Gold, nor as low as Digital Gold.
With Gold Mutual Funds, you have the option of Systematic Investment Plan or SIP. So, you can buy a small amount of Gold each month.
And most of the Gold Mutual Funds has a minimum investment limit of Rs. 500/- only.
- Liquidity –
You cannot sell off your Physical Gold the moment you want to convert your Gold into cash.
You can encash your Digital Gold with just a press of your finger on your Smartphone App.
Though Fund Houses of Gold ETFs hold treasury bills to maintain liquidity of their own, sometimes when the volume of the ETF in the stock market is low, selling off your Gold ETF might take some time.
Gold Mutual Funds also hold some cash to maintain liquidity, so encashing your Gold Mutual Fund Unit won’t be a trouble.
While all the other ways of investing in Gold allow you to exit your position through only one way, Sovereign Gold Bond provide you with three ways to sell off your SGB Units.
(A) Redeem Directly to RBI after 8 Years.
(B) Redeem at the end of the 5th Year.
(C) Sell off Your Sovereign Gold Bond Unit in the Stock Market.
- Loan –
You can apply for a loan using your Physical Gold only if it is in the form of Gold Jewellery or Gold Coin. The Gold Coin must weigh less than 50 Grams.
You cannot apply for a loan keeping your Gold Bullion as collateral. RBI has a strict policy against it.
The Gold you buy through Digital Gold and Gold ETF, are stored in the form of Gold Bullion. So, you cannot apply for a loan using your Digital Gold or Gold ETF.
Gold Mutual Funds basically invest its AUM in Gold ETFs, and Gold ETFs store their Gold in the form of Gold Bullion. So, no loan against Gold Mutual Fund Units.
RBI allow financial institutions like Banks and NBFCs to disburse loan against Sovereign Gold Bond. So, you can apply for a loan keeping your Sovereign Gold Bond as collateral.
- Tax –
If the Gold is sold within 3 Years of purchasing, then a Short Term Capital Gains Tax according to the personal Income Tax Slab is applicable.
If the Gold is sold after 3 Years, then a Long Term Capital Gains Tax of 20% Post-Indexation applies to the profits.
This rule applies to Physical Gold, Digital Gold, Gold ETF and Gold Mutual Fund.
In the case of Sovereign Gold Bond, the 2.5% Annual Interest earned from investing in Sovereign Gold Bond is taxed as per Personal Income Tax Slab.
If the Sovereign Gold Bond is redeemed after maturity, then profits earned in the form of Capital Gains is totally TAX-FREE.
If the SGB Unit is sold after the end of the 5th Year, then also the profits earned in the form of Capital Gains is TAX-FREE.
But if the Sovereign Gold Bond Unit is sold in the secondary market, then the profits earned in the form of Capital Gains is TAXABLE.
- Returns –
Out of the 5 ways to invest in Gold discussed above, 4 of them have some kind of Charge or Tax associated with it. And only one of the way provides a regular stream of income.
(A) Physical Gold – Has some kind of charge and tax associated with it. And it doesn’t provide a regular stream of income.
(B) Digital Gold – Has some kind of charge and tax associated with it. And it doesn’t provide a regular stream of income.
(C) Gold ETF – Has some kind of charge and tax associated with it. And it doesn’t provide a regular stream of income.
(D) Gold Mutual Fund -Has some kind of charge and tax associated with it. And it doesn’t provide a regular stream of income.
(E) Sovereign Gold Bond – Has NO CHARGE OR TAX associated with it. And it PROVIDES A REGULAR STREAM OF INCOME in the form of interest.
So out of all the ways to invest in Gold, Sovereign Gold Bond will generate the best return.
The best way to invest in Gold in India is through Sovereign Gold Bond. Sovereign Gold Bond doesn’t have unnecessary costs and tax associated with it, while it provides a regular income in the form of interest, paid semi-annually. And in most scenarios, the profits earned after redeeming the bond are TAX-FREE.
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