Which Instrument to Go for While Buying Gold as an Investment?

Taxation is a big factor among the modes of investment available in gold investing.

Our tax laws prefer sovereign gold bonds (SGBs). Typically, the SGBs, when purchased from the RBI on issue, are redeemed after 8 years of issue. The gains one makes on SGBs over 8 years are tax exempt in the case of redemption.

This exemption is available even if the SGBs are purchased from the secondary market but held until maturity.

Say, Mr. X buys SGBs from the RBI issue on 1st January, 2020 but sells it to Mr. Y through secondary market on 31st December, 2023. If Mr. Y holds the SGBs till 31st December, 2027, i.e., 8 years from the date of issue of the original bond, whatever gains he makes on SGBs through capital appreciation will not be charged to long-term capital gains tax.

However, this beneficial tax regime isn’t available in any other way of investing in gold, like physical gold including biscuits/coins, jewellery or gold exchange traded funds (Gold ETFs).

Physical gold, SGBs sold within 3 years of purchase are taxed as per the slab rates of the investor as short-term capital gains. However, if they sold beyond the 3 years of holding period, then they are taxed at 20% on gains after considering indexation on purchase value as long-term capital gains. The only exception is SGBs, which are held until maturity.

Whereas, gold ETFs, if purchased after 1st April, 2023 are taxable as short term capital gains, i.e., as per the seller’s slab rate, irrespective of holding period. This means that even if you purchase gold ETFs for 15 years, they’ll be taxable at your slab rate and not at the beneficial rate of 20% after indexation as long term capital gains.

GST of 3% is applicable while purchasing physical gold. However, it isn’t applicable when purchasing SGBs or gold ETFs.

However, one should not confuse gold ETFs with the digital gold that a few fintechs are selling. Gold Savings or their leasing products are still subject to GST at 3%.

This factor again places SGBs on a higher footing.

The risk of a common man buying gold that is not genuine is quite high. However, since 1st April 2023, the government has made 6-digit hallmarking with a Hallmark Unique Identification Number (HUID) mandatory for selling or buying gold.

Moreover, when physical gold is held in your custody, the risk of it getting stolen is always high.

Gold ETFs are represented by 99.5% pure physical gold bars and are regulated by SEBI. However, there's a limited audit mechanism available as far as the digital gold apps are concerned. Hence, the counter-party risk with the digital gold apps selling digital gold remains high.

Since the SGBs come with sovereign backing, they are quite safe. Further SGB are issued in certificate form or in demat form as chosen at the time of investment, so as such there is no risk of fraud or theft of any kind.

Apart from GST, jewellery comes with making charges, which may range from 5-10% or even higher with the top organised players in the industry.

Generally, jewellery holder does not get back the value of making charges while selling their jewellery, and on top of that, resale happens at a rate lower than prevailing market rates.

Holding physical gold, including jewellery may come with locker charges if you wish to keep it in a bank locker. As per HDFC Bank’s website, it may range from ₹1,350 to ₹20​​,000 in metro cities, varying on the size.

Gold ETFs come with an expense ratio, just like mutual funds. Their category average expense ratio hovers around 0.5% per year.

Minimal transaction charges like brokerage, exchange fee etc. and GST thereon, if applicable, may apply while buying Gold ETFs.

The resale value of SGBs and Gold ETFs is generally lower than prevailing market rates. For example, as per Bajaj Finserv, “SGBs trade in the secondary market at discounted rates of 3-7% less than the actual market rate.” However, this also makes SGBs attractive if one has to buy from the secondary market. 

Apart from the appreciation in value of gold, usually you don’t get any return on investment made in physical gold/Digital Gold/Gold ETF. However, in the case of SGB, you get a periodical interest of 2.5% per annum on the amount of the initial investment. The aforesaid interest is credited semi-annually to your bank account. 

Also, many times, a discount of ₹50 per gram on the issue price is given to the investors buying SGB online and making payment through digital mode.

Taking all factors into account, we have prepared this table for you to have a better understanding of the costs involved: