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Digital Gold vs Physical Gold - Which is better?

By Shlok Kamat

22nd Mar 2022

4 mins read

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“Personal Finance” or “Financial Independence” are new-age terms. Yet, generations in India have passed down Physical Gold in their families, realizing the importance of this asset and its growth. We wonder if Gold’s hedge against inflation, or it being a solid collateral for loans was ever a reason for these families to fancy this asset. On average, Indian families allocate about 11% of their wealth to gold. However, something new has arisen that challenges this traditional avenue– Digital Gold. Improved internet coverage and smartphone adoption and services have made this alternate gold investment popular. Let us explore this in detail.

What is Digital Gold?

Digital gold is an online product which enables you to hold gold virtually without owning a safe or bank locker. The seller keeps an equivalent weight of physical gold in a secure vault for each online buy.  Each unit of digital gold is backed by 24K 999.9 purity .

Digital gold, a decade-old model of investing (relatively new) compared to the centuries-old method of possessing physical gold, is gaining investor interest due to advances in digitalisation. Digital gold is considered a cost-effective method of gaining exposure to the  yellow metal. The following players in the industry provide this backing:

  • Augmont Limited, a joint venture between state-owned Metals and Minerals Trading Corporation of India (MMTC) and Produits Artistiques Métaux Précieux, Switzerland (PAMP)
  • SafeGold brand of Digital Gold India Pvt. Ltd.

One can invest in this instrument for as low as ₹100 (In some cases, even ₹1). This product is excellent for those looking to accumulate gold systematically.  The beauty of this method is that you can buy fractional gold via a SIP route.

What is Physical Gold?

Gold is usually bought for consumption purposes. It is purchased in the form of jewellery, gold coins and biscuits. It can be bought directly from a jeweller or a bank with no involvement of an intermediary.

Digital Gold vs Physical Gold

Digital Gold as an asset class is beneficial for the following reasons:

  • Invest in small amounts: There are no minimum purchase restrictions.
  • Redemption: These are highly liquid instruments. One can buy and sell online. Physical delivery of the asset is also offered to investors.
  • Security: Since the gold is not physically present with you, the risk of robbery, damage, etc. are eliminated
  • Portfolio Diversification: It is a good investment option for portfolio diversification and a good hedge asset.
  • Real-time rates: The digital platforms offer real-time gold rates. Therefore, investors can take advantage of the price movements and make purchases. Digital gold rates are uniform across the country.
  • Making charges: Gold in jewellery form attracts at least 8%, making charges and the price of gold while buying it. This increases the buying cost and depreciation of returns; thus, investors now tend to buy digital gold free from any form of making charges.

Digital Gold vs Physical Gold - The Difference Maker

Parameter Physical Gold Digital Gold
Price Physical gold prices are not uniform across the country Digital gold prices are uniform across the country
Cost Buying gold jewelry involves paying 20% – 30% of the gold’s total value as making charges 3% GST is charged on digital gold purchases
Storage One has to safely store the gold in a locker or at their home. Chances of theft and loss are high The seller stores the digital gold in the investor’s name in a secure locker—no chance of theft or loss
Investment Gold biscuits or coins are available in the standard denominations of 10 grams. Hence, it requires a huge investment to invest in physical gold One can buy and sell gold by weight or by fixed worth

Other forms of digital gold worth considering are Gold ETFs and Sovereign Gold Bonds (SGB), both of which require a Demat account. This is perfect for those who want their equity, debt and gold in a single place for more accessible tracking purposes. These will be discussed in the next section.

Today Indian households possess gold for much more than its socio-cultural and economic significance, and hence the bullish sentiment around the future of digital gold only seems to increase.

Nonetheless, The essence of investing in gold as a haven and a good asset remains the same in India, even as the ways to procure and hold it may change from generation to generation.

FAQs

What are the taxes on digital gold?

Gains from gold investments held for less than three years are taxable per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.

Costs associated with buying digital gold?

3% GST is charged on digital gold purchases by the intermediaries MMTC-PAMP or SafeGold.

What is lock-in tenure in SGBs?

SGBs have a term of eight years with a lock-in period of five years. The exit options for SGB are available in the 5th, 6th, and 7th years, and the option needs to be exercised on the interest payment dates.

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