Investing in gold alternatives — digital, ETFs, mutual funds or SGBs? Check if they can be converted to physical gold

Gold held by Indian households is nearing an incredible $5 trillion in value, as per a March research report by Kotak Institutional Equities and accounts for a significant 65% of their non-property wealth. This is largely in form of gold jewellery, coins or bars for personal, cultural and traditional reasons.

Sachin Sawrikar, Founder and Managing Partner of Artha Bharat Investment noted that this works out to 25,000-30,000 tonnes of gold with 24 crore census households, which on average of 100-150 gm each is worth ₹15-20 lakh at current prices.

Besides owning physical gold, Indians can also invest in gold alternatives such as digital gold and paper gold. The latter includes options such as Gold Mutual Funds (MFs), Sovereign Gold Bonds (SGBs), and Gold Exchange-Traded Funds (ETFs).

What is Digital Gold?

The big difference between physical gold and digital gold is that you can purchase the latter online and the issuer stores them in a vault on your behalf. Notably, however, the investment is self-regulated and neither the Reserve Bank of India (RBI) nor the Securities and Exchange Board of India (SEBI) oversee the segment.

What is Gold ETF?

A commodity focused mutual fund that invests in gold in the domestic market, investors can purchase units which are each equivalent to 1 gram of gold and traded similar to equities on the stock exchange. A key benefit of Gold ETF is no hassles of safety and storage of gold, while offering returns comparable to physical gold and convenience of stock trading for liquidity.

What are gold mutual funds?

Gold mutual funds invest in gold ETFs, similar to how regular MFs invest in stocks. You can purchase units through particular fund houses or online investment platforms. Notably, it tracks real-time gold prices and is uniform across India, regardless of which city you reside.

What are Sovereign Gold Bonds (SGBs)?

SGBs are government securities denominated in grams of gold, issued by the RBI on behalf of the Government of India. An alternative to physical gold, sovereign gold bonds give investors the benefit of capital appreciation backed by government security and without extra charges attached to traditional gold holdings. Notably, the scheme has been paused in effect amid concerns over high borrowing and no new tranches have been announced for FY27.

Can your alternative gold holdings be traded for physical gold?

Not all. When it comes to paper gold — Gold Mutual Funds, ETFs, and SGBs — you can only hold the asset on paper but cannot acquire it physically.

Notably, when it comes to digital gold, conversion to physical gold is dependent on the particular platform's term of service. This means that based on a platform’s terms and minimum quantity requirements, the digital gold you accumulated can later be converted into physical gold such as coins or bars. You will however need to check which providers have this service before purchasing the digital gold.

Is digital and paper gold taxed in India?

• Yes, profits from digital gold and paper gold sold in India are taxed as per capital gains.

• According to a Clear Tax report, digital or paper gold sold within 24 months (two years) Short-term Capital Gains (STCG) is applicable at your income tax slab rate.
• While profits from digital and paper gold sold after 24 months (more than two years holding) is taxed as Long-term Capital Gains (LTCG) at 12.5%
• It added that 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.

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.