Buying gold? Check pros and cons of investing in digital or physical forms – experts recommend best method for investment

Indian households hold a mammoth 14 per cent share of global gold at 27,000 tonnes, and only 20 per cent of which is pledged, according to the IIFL Securities report. Precious metals such as Gold and Silver are considered one of the safest investment options by Indians with guaranteed returns. 

As precious metals, especially Gold is one of the favourite instruments to invest in and trade in India, the debate remains the same about how should one invest in it — physically or digitally? Experts decode what should be the better way to invest in yellow metal with respect to tax and from a price point of view —

Expert: Naveen Mathur, Director – Commodities and Currencies, Anand Rathi Shares and Stock Brokers 

Ways to invest in gold can be in the form of digital gold (ETF, gold bonds, etc) or by way of physical gold in the form of bars, coins, jewelry, etc. 

Gold ETFs: They are open-ended mutual funds backed by 24-carat physical gold schemes. Investors must have a demat and trading account with a broker to invest in gold ETFs. The returns are benchmarked on the real returns on physical gold, subject to tracking errors. There are no deductions, except for exit load for a particular period holding. 

Pros:
Transparency and liquidity;
Investment can be done in a staggered manner in Gold ETF;
Regulated by SEBI 

Cons:
Tax implications;
Gold ETFs have a brokerage charge of around 1%;
Digital gold includes additional charges of 3% for storage, insurance fee, etc. 

Sovereign gold bonds (SGB): Investing in SGBs is recommended for people who are looking to invest long-term and derive tax benefits earning a fixed interest rate. SGBs are bonds (denominated in grams of gold) backed by the Government of India. 

Pros:
Fixed interest rate;
Tax exemptions on interest income & capital gains. 

Cons:
Low secondary market liquidity;
Price inefficiencies;
Fixed-rate of tenure. 

Physical Gold: 

Pros:
Easy to get a Loan against physical gold;
Can be passed on to next generation over a longer duration.

Cons:
Making charges of 20 – 25 per cent;
3 per cent GST will be applicable on physical gold transactions;
Storage charges applicable;
Tax inefficient as compared to Gold ETF. 

Expert: Ravindra V.Rao, CMT, EPAT, VP-Head Commodity Research, Kotak Securities Ltd 

Benefits of digital gold range from a guarantee in quality/purity and quantity, no risk of theft, no storage charges as compared to physical gold. If we talk specific to SGB’s there is additional benefit of interest income of 2.5 per cent, no capital gain tax if held till maturity and loans can also be availed to the tune of value of the bond.  

On the taxation front, digital gold is also taxed as per the short-term and long-term capital gain rules. So, if one holds the asset for less than 3 years it will come under short-term capital gains and above three years the gains will be treated as long-term capital gains.  

Manish Maryada, CEO and Co-founder, FELLO 

One of the best ways to buy and invest in gold currently is in the form of digital gold and silver. The best part of this is the ability to buy at smaller ticket sizes as low as Rs 100 and the digital gold is safely and securely stored by asset vault/trustee partners. 

Physical gold has the challenges of buying only in higher denominations, additional storage charges for storing them in lockers in banks if not the security risk of storing it personally at home lockers.