In India, investors can choose various gold investment plans based on their financial needs and risk appetite. While traditional investors might choose to invest in physical gold, others might choose digital gold, gold funds, ETFs and other forms of gold. Learn about the significance and tax implications of gold investment in different forms to make informed decisions.
Why Should You Invest in Gold?
Here are the reasons to invest in gold:
Hedge Against Inflation
Historical data reveals the value of gold increases in the long run with an increase in the cost of living. Its value reaches its peak during inflation, ensuring returns that help beat inflation in the economy.
Diversification of Portfolio
Investment in gold helps investors diversify their portfolios to balance risks and rewards. As the value of gold is often inversely proportional to stocks, investors can enjoy diversified returns during market volatility.
Cultural Significance
Gold is limited in supply as it is a natural resource. However, due to cultural significance in a country like India, gold has high demand among the nation’s population. Despite its limited supply, gold will likely be in high demand in India.
Liquidity
Gold investors can enjoy high liquidity with their investments in gold. They can sell or secure loans against their gold holdings during financial emergencies. This helps them meet their immediate fund requirements when necessary.
Stability Against Currency Devaluation
Gold is a specific asset class that protects investors against currency devaluation. In times of market uncertainty, when currency values may decline, gold investments can provide stability, as their value tends to increase in such conditions.
Global Acceptance
Gold is an internationally accepted asset class. Investors can encash gold holdings anywhere across the globe for liquidity. This ensures the global mobility of the asset.
List of Gold Investment Plans Available in India
You can invest in gold in multiple ways as follows:
Physical Gold
Physical gold includes gold coins, jewellery, gold bars and other similar forms of gold that are tangible. As a gold investor, you can sell your physical gold in later years when gold valuation is high. However, the disadvantages of physical gold include additional making charges, difficulties in storing and risk of theft.
Gold ETFs (Exchange Traded Funds)
Gold ETFs are dematerialised gold wherein 1 unit of gold ETF is equivalent to 1 gram of physical gold. It allows investors to purchase gold in collective vaults rather than purchasing physical gold. It eliminates the risk of theft, storage hassles and making charges.
Gold Mutual Funds
Gold mutual funds or gold funds allow investors to invest in stocks of gold mining companies. It is an alternative to physical gold helping investors to invest without the risk of theft or storage difficulties.
Gold Scheme
Gold schemes are often offered by jewellers and vary based on the jeweller’s policies. Investors can invest a predefined amount with jewellers based on the terms and conditions to accumulate money and purchase physical gold at a later date.
Digital Gold
Several online financial platforms offer the option to purchase digital gold, allowing investors to buy and sell gold without the need for physical possession. This eliminates the need for storing physical gold, while still enabling the seamless buying and selling of gold in a secure digital format.
Government-issued Gold Bonds
The Reserve Bank of India issues Sovereign Gold Bonds (SGBs) which are government-issued securities for investors. The value of SGBs is denominated in multiples of grams of gold. The cost of purchasing or selling SGBs is significantly lower compared to physical gold.
How Are Physical Gold Different from Other Gold Investment Plans?
Here are the key differences between physical gold, gold ETFs and gold funds:
| Physical Gold | Gold ETFs | Gold Mutual Funds |
|---|---|---|
| No need for a demat account | You need to invest using a demat account | No need to have a demat account |
| With increasing inflation, gold prices are likely to increase | Gold price fluctuations affect gold ETF prices | Fluctuations in gold prices do not directly impact gold funds directly |
| No investment charge or paperwork is applicable | Paperwork needs to be undertaken | Paperwork is mandatory for trading |
| Buyers’ risk of theft | No risk of theft | No associated risk of theft |
| SIP (Systematic Investment Plan) option is not applicable | SIP does not apply | You can opt for SIP options |
| Suitable for traditional investors | Suitable for investors engaged in intraday trading | Suitable for investors with a high-risk appetite and interest in the stock market |
Minimum Amount for Gold Investment Plans
Here is the minimum amount to invest in different gold investment plans:
| Gold Investment Plans | Minimum Amount of Investment |
|---|---|
| Physical Gold | ₹6,000 to ₹7,000 approximately, based on the current price of 1 gram of gold |
| Sovereign Gold Bonds | Fluctuates based on the current price of 1 gram of gold |
| Gold ETF | ₹6,000 to ₹7,000 approximately, based on 1 gram of gold price during that period |
| Gold Mutual Funds | ₹100 |
| Digital Gold | Varies based on the online platform you use |
Costs Associated with Various Gold Investment Plans
Here are the costs associated with different gold investment plans:
| Gold Investment Plans | Costs Associated with the Investment Plan |
|---|---|
| Physical Gold | Making Charge: 3% to 25% of the gold price or a specific rate |
| Insurance Storage Charges: 3% to 4% per annum | |
| GST: 3% of purchase price | |
| Digital Gold | GST: 3% of purchase price |
| Spread: 2% to 6% | |
| Gold ETFs | The expense ratio, demat account charges and brokerage amounting to 0.5% to 1% annually |
| Gold Mutual Funds | 0.6% to 1.20%, including expense ratio of 0.1% to 0.2% |
| Sovereign Gold Bonds | No specific expenses |
Tax Rules on Gold Investment Plans
Here are the tax rules for different gold investments:
Digital Gold
Selling digital gold before 3 years results in short-term capital gain (STCG). STCG on digital gold investment is taxed based on the investor’s income tax slab. However, selling digital gold after 3 years, results in long-term capital gains (LTCG). A 12.5% LTCG is levied uniformly for all asset classes including gold.
Physical Gold
The tax rules for physical gold are the same as that of digital gold taxation. LTCG and STCG apply at the same rate as digital gold.
Gold Mutual Funds
For units purchased between April 1, 2023, and March 31, 2025, any gains will be included in the investor’s taxable income and taxed according to the applicable income tax slab rates, regardless of how long the units are held. For units bought after March 31, 2025, and sold after two years, a 12.5% tax on the gains will be applicable, without the benefit of indexation.
Gold ETFs
If you purchase gold ETFs between April 1, 2023, and March 31, 2025, any gains will be added to your taxable income and taxed according to your applicable income tax slab rates, regardless of the holding period.
However, if you buy gold ETFs after March 31, 2025, and sell them within 12 months, the gains will be taxed at the applicable income tax slab rates. For sales after holding the ETFs for more than 12 months, a 12.5% tax will be applied on the gains, but without the benefit of indexation.
Sovereign Gold Bonds
The interest you receive on sovereign gold bond investments is taxable. However, if you redeem the sovereign gold bonds, capital gains tax does not apply. In addition, if you sell these bonds in the secondary market at the Indian stock exchanges then STCG and LTCG apply.
SGBs held for 12 months or less will be treated as short-term capital assets and taxed at the applicable income tax slab rates. If you sell gold investments after 12 months, LTCG applies to the capital gains at the rate of 12.5% without indexation benefits. However, you can enjoy LTCG tax exemption up to ₹1.25 lakh.
Things to Consider Before Investing in Gold
Here are the factors that you need to consider before investing in gold:
Performance
Gold performance varies based on the gold investment plan you choose. For instance, the returns on investment in physical gold, sovereign gold bonds, gold funds and gold ETFs vary significantly. Ensure you check the performance of the gold investment you plan to invest your funds in.
Security
Physical gold is subject to the risk of theft. As a result, you need to ensure that you store physical gold securely. On the flip side, digital gold, gold funds or gold ETFs do not require storage and hence do not have theft risks. Ensure you plan storage security while purchasing physical gold.
Portfolio Diversification
Gold in an investment portfolio can help you diversify your holdings. Even though the price of gold is inversely related to the stock market, the case might not be the same in the forthcoming years. Ensure to check the market conditions before investing in such an asset class.
Final Word
Gold investment plans are effective in helping investors diversify their portfolio of investments. The availability of different forms of gold in the market allows investors to choose a type based on their convenience.
Investing in physical gold requires additional storage facilities for safety over other forms of gold in the market. Based on your storage facility availability, you can choose physical gold or gold ETF, gold funds, sovereign gold bonds and digital gold for investment.
Frequently Asked Questions
There is no one-size-fits-all approach to investing in gold. However, financial experts advise investing around 10% to 15% of the total investment amount in gold for portfolio diversification. This helps balance the risk in the investment portfolio.
You can invest in gold by purchasing physical gold like gold coins, bars and jewellery. In addition, you can buy digital gold, gold ETF, gold mutual funds, gold monetisation schemes and sovereign gold bonds to start your gold investment journey.
Based on your risk appetite, you can choose to invest in gold or Fixed Deposit (FD) or both. FDs are low-risk investment options for conservative investors offering stable returns. On the flip side, gold prices fluctuate based on multiple factors.
