Gold Investment Options in India

Gold is a popular investment option in India due to its high liquidity and demand. Additionally, gold can help individuals generate returns that beat inflation, making it a lucrative addition to an investment portfolio. Typically, individuals have the option to invest in physical gold. However, there are several other forms of gold available in the investment market today. For instance, individuals can choose to put their money into digital gold, gold ETFs, gold sovereign bonds, and gold mutual funds. Notably, each type of gold investment has unique traits and offers varying returns. Hence, to understand which gold form is most suited for investment individuals need to check the features and limitations of each option.

Take a quick look at the article to learn more about gold investment in India. 

Types of Gold Investment Options in India

Popular gold investment in India include –

Digital gold: In such an option, there’s no physical gold involved, only the underlying asset is considered to be the precious metal. Individuals can invest in gold in denominations starting at 1gm via investment apps.

Gold Exchange Traded Funds: Gold ETFs can be traded readily on stock exchanges. Typically, these options feature stocks of gold refining and mining companies and physical gold as the underlying asset. However, to invest in gold ETFs investors need to have a Demat account.

Gold Mutual Funds: These funds are managed by AMCs who abide by a fund-of-fund structure and make a majority of their investment in Gold ETFs. Investors can determine their returns on these funds by using a gold mutual fund calculator. 

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Sovereign Gold Bonds: The Reserve Bank of India issues this investment option regularly through recognized private and public sector banks. Notably, these bonds do not have any physical gold as their underlying asset, and the returns are linked to the gold rate in India

Major Risks of Investing in Gold 

Investing in gold has its share of risks. The following highlights the investment risks associated with each type of gold investment in India –

Physical gold – They demand security and gold being a precious metal is prone to theft. Additionally, concerns related to purity and loss of weight during the making process are also prevalent.

Digital gold: In India, digital gold lacks regulatory guidelines. This makes investors wary of the investment option despite its liquidity and returns component.

Sovereign gold bonds: Changes in the regulations and returns rate by the government of India tend to affect the performance of this gold investment option in India.

Gold ETFs: Since gold prices tend to affect the price of gold ETFs, the volatility in the value of this precious metal often surfaces as an issue.

Gold mutual funds: Market volatility triggered by the cost of gold tends to influence the performance of these mutual funds.

Liquidity of Gold Options

Liquidity is the ease with which an investment instrument can be bought or sold in the market. Typically, gold ETFs, physical gold, gold mutual fund, and digital gold can be sold readily in the market, making them liquid investments. Notably, sovereign gold bonds come with an 8-year maturity period. However, individuals can still redeem deem before that in two ways –

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Encash the bonds prematurely after 5 year of holding period, which is the lock-in period of the investment option. Individuals can redeem the units before 5 years by listing them in the secondary market often at a discounted rate. They can do so after 6 months from the date of issue. 

Individuals can also raise funds with the help of sovereign gold bonds by taking out a loan against them. They can avail of up to 35% of the bond value they use as collateral. 

Taxation of Gold Options

Gold investment options in India are taxed at maturity or during sale and proceeds are subject to capital gains taxation rules. Notably, the rules are subject to investment options such as physical gold, gold mutual funds, digital gold, and gold ETFs. However, the capital gains are categorized as long-term capital gains and short-term capital gains based on the holding period of the investment. For instance, if the holding period of the gold investment option is up to 3 years, the proceeds on sale are categorized as short-term capital gains and attract short-term capital gain tax. On the other hand, if the gold investment option was held for more than 3 years the proceeds on sale are categorized as long-term capital gains and attract long-term capital gains tax.

Taxation Treatment of  Gold Investment Options
  Holding Period Digital Gold Gold Funds Physical Gold
Short Term Gains Up to 3 years Tax slab Tax slab Tax slab
Long Term Gains Over 3 years Tax slab At 20% after indexation


Tax Treatment of Sovereign Gold Bonds

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Sovereign Gold bonds are taxed in these 4 possible ways –

  1. Tax on interest amount: The earnings on sovereign gold bonds are liable for taxation. First, the returns are added to the income for the given year and then taxed as per the applicable slab rate.
  2. Tax on premature redemption: If investors encash their investment prematurely but after 5 years the sale proceeds will be tax-free. The Reserve Bank of India allows a redemption period every 6 months after post 5-year lock-in period to enable investors to encash prematurely.
  3. Tax on maturity: Encashing sovereign gold bonds post 8 years, the returns on the investment will not be taxed.
  4. Tax secondary-market sale: Sovereign gold bonds redeemed through the secondary market are taxed as per the norms of capital gains. In case of sale before 3 years the proceeds are added to the investor’s income in a given year and taxed according to their tax slab. Selling the bonds after 3 years will attract a 20% tax post-indexation.

Individuals should note these features and limitations of the different gold investments in India and prepare their investment plans accordingly. However, besides these, individuals are also recommended to understand their risk-taking capacity in-depth and understand the extent to which gold prices can influence their portfolio to develop a better approach.


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