Digital Gold explained: Here's all you need to know about cost, associated charges, risk and tax liability for the asset

Gold holdings with Indian households have neared a whopping $5 trillion, according to a research report by Kotak Institutional Equities, which showed that value of this stock has rocketed to comprise 65% of non-property wealth in the country.

Further, at around 25,000 to 30,000 tonnes of the asset, divided across 24 crore census households, each holds around 100-150 grams of gold worth between ₹15-20 lakh at current prices, estimates Sachin Sawrikar, Founder and Managing Partner of Artha Bharat Investment.

Notably, if your investment in gold is not for personal use (cultural, marriage, children's education, etc.), there are other alternatives to choose when looking to invest in the asset. Besides purchasing physical gold (i.e. gold jewellery, coins or bars), you can also consider Digital Gold, Gold Exchange-Traded Funds (ETFs), or Gold Mutual Funds (MFs) as options.

Today, we explore digital gold — what it means, what is the cost, and what are the associated charges, tax liability and regulatory protections.

What is Digital Gold?

According to a report by Clear Tax, digital gold is conceptually not very different from physical gold. The big difference is that you can purchase digital gold online and the issuer stores them in a vault on your behalf.

Notably, India's central bank the Reserve Bank of India (RBI) and markets watchdog the Securities and Exchange Board of India (SEBI) do not have regulatory authority over this investment.

It is however subject to income tax rules, where returns on digital gold held for over 24 months or longer, is termed under long-term capital gains (LTCG) at 12.5% with applicable cess; and less than 24 months (two years) is taxed under short-term capital gains (STCG) at rate as per your income slab, it added.

When it comes to sale of digital gold, the tax is similar to physical gold and paper gold (includes Gold ETFs, SGBs and Gold Mutual Funds).

Digital Gold — Key highlights

What are the benefits of digital gold?

• It is affordable, with investment charges starting at ₹10 and sometimes as low as ₹1, depending on the asset company.
• It is easy to hold and store, as you individually do not have to ensure safety and security of physical gold (jewellery, coins or bars), but it is instead secured in vaults by the asset company.

• It is a liquid asset, that can be bought and sold at any time without need for a demat account.
• It can be used as a gift and includes none of the making charges attached to traditional gold purchase.
• Depending on the asset manager and terms of investment, you also have option of converting your digital gold into physical gold.

What is the Tax Implication of Digital Gold?

Tax on digital gold depends on the holding tenure of the asset, as follows:

• Profits from digital gold sold within 24 months (two years) is taxed as Short-term Capital Gains (STCG) at your income tax slab rate.

• Profits from digital gold sold after 24 months (more than two years holding) is taxed as Long-term Capital Gains (LTCG) at 20.8%.

According to a Clear Tax report, you can claim LTCG exemption from gold investments under Sections 54F (invest gains into a residential house) and 54EC of the Income Tax Act 1961.

Key things to consider before investing in Digital Gold

• Ensure complete due diligence before opting for digital gold. Check the fine print for any investment you make and understand the terms properly before signing on.
• Digital Gold falls under the regulatory grey zone and is not under the purview of any financial sector regulator such as SEBI or RBI.

• The segment is self-governed and could be deemed a high-risk investment for most ordinary investors.
• There is no stable interest to be earned by Digital Gold, so despite capital appreciation, possible earnings will be at time of sale only.
• Charges include 3% GST to the purchase value, same as with physical gold purchases in India. There could also be platform charge which covers costs such as storage, insurance, logistics and other operations.
• Experts typically advice have gold comprise no more than 10% of your investment portfolio, so when making an investment, consider how you want to allocate, the use case and risk appetite. Take into account the pros and cons for your personal goals before making an investment decision.

Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.