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Gold is a unique asset: highly liquid, yet scarce; it's a luxury good as much as an investment. Gold should be an important part of a diversified investment portfolio because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. These days digital gold is available in different forms.
If you are planning to buy gold digitally, here are some options you can explore.
SOVEREIGN GOLD BONDS
Reserve Bank of India (RBI) issues Sovereign Gold Bonds (SGBs) in denominations of one gram of gold and in multiples thereafter. A direct substitute to holding the yellow metal in physical form is buying these SGBs.
An individual can invest up to 4 kg worth of SGBs in one financial year. In the case of joint holdings, the limit applies to the first applicant.
These bonds also offer an annual interest rate of 2.5% on the initial investment amount. Interest earned on SGBs is taxable. It is added to the overall income of the buyer and taxed as per the marginal slab rate.
The bonds mature after eight years, and early redemption is allowed after five years.
An investor will either need to purchase them in the secondary market or opt for gold ETFs.
It isn't easy to get SGB at the right price on exchanges. Sellers, typically, as for a premium to the prevailing gold prices.
SGBs bought in the primary market are exempt from the capital gains tax if held till maturity. In the case of premature withdrawal after the fifth year, the gains are taxed at 20% with indexation benefit.
If you sell them on stock exchanges within one year of purchase, the gains are added to the income. After one year, the gains are considered as long-term capital gains and taxed at 10%.
Investors may need to sell SGBs at a discount on stock exchanges if they want to exit within five years of purchase and may not get the right price.
DIGITAL GOLD
To make physical gold more attractive, investment apps and wallets are offering digital gold. There are no storage charges. The option works for those seeking to buy physical gold at a later date.
An individual can purchase gold for as low as one rupee at any time of the day. However, the buyer will need to pay the Goods and Services Tax of 3%.
Buyers can ask for delivery of physical gold once they have accumulated at least one gram of the precious metal.
One can also sell it on the wallet or investment apps. However, there is a significant difference in the buying and selling price due to GST.
Digital gold investment is treated similarly to physical gold ownership for taxation. If you sell within three years of purchase, the gains are added to the income and taxed as per the slab. Digital gold sold after three years is taxed at 20% with indexation benefit.
They are not meant for investors as the selling price is lower than buying price. If you take physical delivery of gold, there will be making charges.
EXCHANGE-TRADED FUNDS
Gold Exchange Traded Funds (ETFs) are primarily paper gold. The money you invest will be pegged to 24-carat gold. The underlying asset is gold and some cash.
To invest in these ETFs, you need to open a Demat account.
When you redeem, you don't get physical gold. You will get the monetary equivalent of the price of gold on the day of redemption.
ETFs have two costs. One is the expense ratio and the second is the cost of opening a Demat account maintenance charges.
Mutual Funds get an offset on the GST, which means at any sale of physical gold, they get offset benefit from the GST paid at the time of buying. Effectively this does not lead to any losses to investors on account of the GST levy. (Gold ETFs straight away saves them a 3% cost)
ETFs are taxed just like physical or digital gold.
There's no storage cost and score over others when it comes to liquidity.
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