Whenever a festival season rolls in India — be it Dhanteras, Diwali or Akshay Tritiya, what is the first thing that comes to every household's mind?
Visiting a jewellery shop followed by buying gold coins or a chain and finally returning home with gold wrapped in a red cloth.
For decades older generations have believed that buying physical gold is the safest way to save money. Whenever there was an emergency or a wedding in the family, gold came to their rescue.
But what if I tell you that buying gold from a local jeweller is not as wise as you think?
When you go to a jewellery shop with your hard-earned money, you are not buying gold! You are paying extra 15-25% as making charges and GST on top of the gold price. When you finally leave the shop with your gold biscuits in hand, that extra ₹15,000 is gone forever in the air. The next thought that comes to your mind is where to store your gold safely. You cannot keep it at home because you have to take it to the bank and rent a locker for ₹3,000 to ₹7,000 every year.
Buying gold jewellery or physical gold is actually one of the worst ways to save money if your main objective is to earn good returns and safeguard your hard-earned money against inflation.
Can you think of a way where you can buy 22K or 24K gold with:
No making charges
No rental charges
No worries about theft?
Yes, you can!
There are three such brilliant modern-age investment instruments in India which allow you to buy high purity gold.
One even pays you extra 2.5% cash interest every year in your bank account!
And the best part is you can start with as low as ₹60 to ₹100!
They are called Sovereign Gold Bonds (SGB), Gold ETFs and Digital Gold.
In this beginner-friendly guide, let’s discuss the pros and cons of each of the three to help you decide which is the best fit for your financial goals.
WHY IS BUYING PHYSICAL JEWELLERY A BAD IDEA?
Let’s start our discussion by analysing what actually happens when we buy gold jewellery or biscuits:
Making and wastage charges vanish your money
Say you buy a gold chain worth ₹1,00,000 from a local jeweller. He takes 10-15% extra as making charges bringing the final price to ₹1,15,000 or above. If after 6 months you return to the same jeweller to sell him the gold chain, he will give you only ₹85,000 to ₹90,000. The extra 15,000 you paid as making charges is gone for good!
3% GST is always applicable
For every transaction of gold in India, 3% GST is applied on the gold price. This means that a gold biscuit’s market price needs to increase by at least 3% before you can make any profit.
Purity and resale value are questionable
Even though most gold jewellery and biscuits are 916 purity (22K), many local jewellers deduct 5% extra for melting charges when you return the gold to them for cash.
Locker rent eats away your profits
You cannot keep your gold biscuits at home for safety. While a safe at home might be an option when you are on vacation, a locker at the bank is the most preferred option. However, it will cost you ₹2,000 to ₹8,000 every year as a locker rent. Over a span of 10 years, this will cut into your profits by as much as ₹40,000 to ₹60,000!
Now that we understand why many young professionals and investors are asking the question “how can I buy gold without these extra charges?”, let’s move on to Sovereign Gold Bonds.
Option 1: Sovereign Gold Bonds (SGB)
If you ask any experienced financial planner regarding the best gold investment option in India, 9 out of 10 will tell you it’s the Sovereign Gold Bonds (SGB).
What is an SGB?
An SGB is a government issued bond which is issued by the Reserve Bank of India on behalf of the Government of India. Instead of giving you a physical gold bar, they give you a certificate or directly deposit it to your Demat account.
Each bond is equivalent to 1 gram of gold of 999 purity.
How much returns can you expect on SGB?
There are two types of returns you can expect when you invest in Government Gold Bonds:
1. Return due to rise in gold price: Say 1 gram of gold cost ₹7,000 when you bought the bond and it increases to ₹11,000 after 8 years, you will get ₹11,000 on maturity.
2. Extra 2.5% cash interest on top of the gold price: This is the most attractive part of Sovereign Gold Bonds. On your initial investment amount, you will get an extra 2.5% in the form of cash interest every year directly deposited to your bank account.
This means, while your gold savings in a locker are depreciating (due to no interest), the gold in your SGB is paying you cash every six months!
Another big advantage of SGB: 100% Tax-Free Returns!
The Income Tax Act in India allows an exception for profits made on Sovereign Gold Bonds. This means, if you keep your SGB until the maturity date (which is 8 years from purchase date), the extra profit you make on the rise in gold price is completely tax-free.
This is a fantastic feature because the Income Tax Department usually assumes that any profit you make from selling an asset (property, stock, gold etc.) is a capital gain and taxes you on it.
You pay income tax every year on your salary and other incomes like interest income from fixed deposits and bonds. However, on the profit from selling gold jewellery or biscuits, the government taxes you even more heavily (up to 30%).
Things to remember about Sovereign Gold Bonds:
Lock-in period is 8 years: This means you cannot sell or redeem your SGB before 8 years.
Exit window opens from 5th year: From the 5th year onwards, you will have an option to exit on the interest payout date.
Buy anytime: Even when a new batch of SGB is not on sale, you can always purchase existing bonds from the stock market via your demat account (Zerodha, Groww, Upstox, AngelOne etc.) at a slight discount to the prevailing gold price!
Option 2: Gold ETFs
Do you want to save for 3-5 years? Do you want to start a monthly SIP of ₹500 or ₹1,000 to save gold? Do you want to be able to exit anytime in case of an emergency?
If yes, then Gold ETFs (Exchange Traded Funds) are the best option for you.
What are Gold ETFs?
Gold ETFs are mutual funds which invest in 99.5% purity gold bullion. These gold funds are listed on the stock market (NSE and BSE) and can be purchased just like buying shares of a company like SBI or Tata Consultancy Services.
Big mutual fund companies like Nippon India, HDFC, ICICI Prudential and SBI Mutual Fund allows retail investors to buy/sell units of Gold ETFs on the stock market. The gold bullion purchased by the fund is stored in bank vaults under very secure conditions.
To buy Gold ETFs all you need is a Demat account. Open your Demat app, search for “Nippon Gold ETF” or “HDFC Gold ETF”, and you can start buying in just a few taps! With Gold ETFs you can start buying as little as 1 unit at a time.
Benefits
Super easy liquidity: If you need money urgently, sell your Gold ETF units and the money will reflect in your bank account within a few minutes during market hours (9:15 AM to 3:30 PM). This is much faster than withdrawing money from a bank locker.
SIP facility available: You can start a systematic investment plan (SIP) to start investing ₹500 or ₹1,000 every month in Gold ETFs.
Gold price transparency: The price of Gold ETFs is updated every second according to the current market price of gold.
Very low expense ratio: Gold ETFs do not involve any making charges or locker rent. The only expense is the fund management fee (expense ratio) paid to the mutual fund company which is around 0.30%-0.50%.
Option 3: Digital Gold (UPI)
On Google Pay, PhonePe or Paytm, did you ever see the option “Buy 24K Gold from just ₹1!” and wonder whether it is a good investment option?
We do too!
Let’s go through how it works and explain the pros and cons.
Digital Gold is the easiest way to start saving gold in India. With just a few taps on your smartphone, you can start buying gold.
But before you start saving gold every month, it’s important you know the following:
How does digital gold work?
What happens when you click that “buy gold” button on your UPI app?
The gold you buy is stored in digital form by private vault companies like MMTC-PAMP or Augmont Gold.
When you make a ₹100 transaction, they buy 100 grams of 24K gold from the market and keep it in an insured locker in your name.
You can keep accumulating gold and later sell it to them to get cash or pay extra delivery charges to get 1 or 2 grams delivered to your home address.
The 3 biggest disadvantages of digital gold:
1. You still have to pay a 3% GST on the gold you buy.
2. The buy and sell price of gold has a huge difference called “spread”.
Go to your digital gold app and check the “Buy” and “Sell” price. You will see a huge gap between the two (usually 3%-6%).
This means, the moment you buy gold, its value drops by 5-6% (GST + spread). Gold has to increase by 5-6% before you can break-even.
3. The maximum time you can keep your gold with the vault company is 2-5 years. After that you have to sell it back to them or pay heavy delivery charges to get it delivered to your home.
Unlike Gold ETFs and Sovereign Gold Bonds, digital gold is not regulated by SEBI or RBI.
Simple conclusion: If you just want to save your spare ₹50 or ₹100 on your phone as a student this might be fine. If you have serious savings goals, it’s better to avoid digital gold.
Taxation of Gold Investments – A Layman’s Guide
Tax on Sovereign Gold Bonds:
Tax on Gold ETFs:
Tax on Digital Gold:
Taxes 3% percent of Gst are payable in purchase and other extra things also.
How much Gold should an average Indian family hold?
When it comes to gold, most Indians fall into the trap of putting all their money into gold. One of the common myths about gold is that it is the ultimate wealth protector and an assured hedge against inflation.
While gold has always been a safe haven during geopolitical tensions and market volatility, it cannot create wealth.
If you are creating wealth by working hard and investing smartly through stocks, real-estate or business, gold is just a small part of your overall wealth creation plan.
The primary role of gold is to act as a hedge / insurance against inevitable market crashes. When gold rises, the value of your stocks, real-estate and other assets fall, balancing things out.
Most financial planners suggest that 5%-15% of one’s total portfolio should be in gold.
Say your total savings are ₹500,000 in various fixed deposits, mutual funds, PPF etc., then ₹30,000 to ₹50,000 should be in paper gold (Gold ETFs or Sovereign Gold Bonds).
Which one is best according to the Situation?
A. “I have some money lying around and want to park it for 5-8 years.”
👉 Choose Sovereign Gold Bonds.
With SGB you get the best of both worlds: guaranteed interest income + capital appreciation on gold. There are no extra charges unlike with physical jewellery. You also don’t have to worry about paying rent to the bank every year for a locker. And finally, the profit on maturity of SGB is completely tax-free!
B. “I want to start a monthly ₹500 or ₹1,000 SIP in gold or exit the investment anytime for an emergency.”
👉 Choose Gold ETFs.
They offer incredible flexibility and liquidity. Start a SIP of ₹500 every month, and you will have enough gold to meet your goals in no time. The gold is held in a bank vault, and you can sell your units anytime during market hours to get cash in just a few minutes.
C. “My sister or daughter is getting married in a few months and we need to buy some gold jewellery for her.”
👉Physical Gold
Buy from a trusted jeweller and negotiate the making charges. This is one of those rare occasions when you should not think about gold as an investment.
Your Thoughts Matter!
Gold has always been an important part of our country’s culture and tradition. But I hope you now see that the age of storing gold coins in a tin dabba is over.
By using the modern financial instruments such as Gold ETFs and Sovereign Gold Bonds you can protect your family’s financial future and utilise every rupee to its maximum potential.
Now that you have seen the advantages and disadvantages of each gold investment product, I would like to hear your thoughts.
Have you started investing in Sovereign Gold Bonds or Gold ETFs?
Are you still buying physical gold biscuits or jewellery?
Let me know your thoughts in the comments below!
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