Home / Money / Personal Finance /  Play it safe while investing in digital gold

Buying gold has never been easier. Thanks to the emergence of digital gold, you can buy this much-loved precious metal with just a few clicks. What adds to its appeal is that digital gold can be bought for small sums with no worries about safe storage at home. And you don’t need a demat and trading account with a broker for it. 

Digital gold is a convenient way of buying 24 carat gold backed by physical gold that is insured and stored in vaults that are monitored by a trusteeship company to safeguard customer interest. Digital gold is sold by MMTC-PAMP, Digital Gold India Private (brand name, SafeGold), and Augmont Goldtech Private. You can buy it either by opening an account with these firms or with their distribution partners such as Paytm, PhonePe, Flipkart, and Amazon. For example, you can buy MMTC-PAMP’s digital gold from Paytm  or SafeGold’s digital gold from Amazon. The partners only provide a platform for transactions and do not hold the underlying physical gold.

The physical gold stored in custodian vaults is watched over by a trustee, whose role is defined by the terms and conditions of every digital gold provider. But there are no regulations standardizing this role and this can vary across players, according to one industry person we spoke with. Before you go down the digital gold route, here’s what you need to know.

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Other regulated options 

Unlike other tightly regulated products such as gold ETFs, gold funds (funds that invest in gold ETFs) and sovereign gold bonds  (SGBs), digital gold does not fall under the ambit of a regulatory body such as RBI and Sebi. Financial planners that we spoke with recommended against investing in digital gold for this very reason.

Investment returns 

For investors, the investment horizon and the ease with which digital gold can be sold are important factors to consider. On this basis, gold ETFs or SGBs can be a better choice. Gold funds can also work for those who do not have a demat account, albeit with higher expense ratios. The price of the underlying gold backing these instruments is, however, largely the same. 

Chirag Mehta, CIO, Quantum AMC, explains that gold ETFs trade at prices reflective of the physical wholesale gold market in India. The pricing of SGBs is based on Indian wholesale market data sourced from IJBA. Similarly, digital gold is backed by gold sourced from the wholesale market and hence, the pricing is comparable with these instruments.

Charges and taxation

So, what does one pay when buying digital gold? You will be taxed 3% goods and services tax (GST) at the time of purchase as in the case of jewellery. Apart from this, in general, there is a 2.5- 3% (buy-sell spread) difference between the buying and selling price of digital gold.  On exit, you have two options. You can sell your digital gold for cash (which gets credited to your bank account) or you can redeem it in the form of physical gold (coins/bars) for delivery. You must redeem a certain minimum quantity. For example, with MMTPC-PAMP and SafeGold, you must redeem a minimum of 0.5 gm and multiples thereof. There is also a redemption cost: cost of minting the gold coins/bars, packaging, insurance and shipping. This is typically a flat charge and does not go up in proportion with the grammage. Costs aside, you also need to check if your area pin code is eligible for delivery. According to Archit Gupta, founder and CEO, Clear, digital gold is taxed similar to physical gold when you sell it. Short-term (holding period of up to 3 years) capital gains, if any, are taxed at your income tax slab rate. Long-term capital gains are taxed at 20.8% with indexation benefit. However, there is no capital gains tax when redeeming it for physical gold.

Holding period, keeping track

As digital gold is backed by physical hold, holding digital gold beyond a certain period results in storage charges. Both SafeGold and MMTPC-PAMP levy charges for storage beyond five years. Long-term investors must take note.  Regular monitoring can also be a challenge. You can log into your account with a digital gold seller/partner distributor to check the status of your digital gold holdings. 

However, unlike with gold ETFs, there are no emailed monthly statements to keep you up to date. With the plethora of well-regulated and cost-effective routes to investing in gold, those who want to play it safe can give digital gold a skip.

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