Dhanteras is a time when people buy gold and other precious metals as a symbol of wealth, prosperity, and good fortune. The festival marks the beginning of Diwali festivities, and buying gold is considered auspicious.
Apart from its festive appeal, gold is also considered a hedge against inflation and economic uncertainty because it has historically proven to be a safe haven, keeping people's hard-earned money's value secure. So, people buy gold for investment purposes as well.
While jewellery remains one of the most favoured instruments during Dhanteras, it comes with certain considerations. Buyers of gold jewellery are levied a 3 per cent goods and services tax (GST) and additional making charges. Beyond the costs, physical jewellery also carries risks such as theft, the need for secure storage, and potential challenges in liquidity when selling.
If an investor wants to avoid these concerns, there are various other modes of investment These include gold coins, bars or biscuits, digital gold, gold exchange traded funds (ETFs), gold mutual funds, and sovereign gold bonds (SGBs). Let's delve deeper into each of these investment vehicles.
Physical Gold
Gold coins, bars or biscuits do not come with making charges, unlike jewellery. Some sellers might add making costs, but these charges are minimal in comparison to the making charges for jewellery.
Tax Treatment: The tax treatment of coins and bars is the same as that of jewellery, which is 3 per cent GST. Like jewellery, if you sell gold coins or bars after 24 months, any profit you make is treated as long-term capital gains (LTCG) and is taxed at a flat 12.5 per cent, without indexation benefit, as per the new tax rules effective July 23, 2024. For short-term, which means selling gold within 24 months, short-term capital gains (STCG) tax is applied according to your income tax slab.
Risks: The main risks include the cost of storing them safely, just like jewellery. But the good part is that coins and bars are pure and typically easier to liquidate than fancy jewellery.
Digital Gold
Digital gold works much like physical gold, but the only difference is that you can buy it online, and the issuer takes care of storing it in secure vaults. This means you do not have to worry about physical storage and theft.
Tax Treatment: In terms of taxes, digital gold is treated the same way as physical gold. A 3 per cent GST is charged when you buy it. If you sell digital gold after holding it for more than 24 months, any gains are treated as LTCG and taxed at a flat 12.5 per cent. If you sell before 24 months, the gains are considered STCG and taxed according to your income tax slab.
Risks: The biggest risk with digital gold is that it does not fall under any regulatory authority. When you buy digital gold, the provider buys an equal amount of gold in your name and stores it in their vaults or with a third party. A trustee is appointed, who is assigned the responsibility to ensure that the quantity and purity of the gold match what you bought, but there is no regulator to check if the trustee is doing their job properly. Audits are carried out, but the auditors are appointed by the provider and report back to them, not to an independent authority.
Gold ETFs
Gold ETFs are investment funds that pool money from many investors to buy gold. These vehicles trade on stock exchanges and aim to track the prices of physical gold. Gold ETFs come with an expense cost, which is basically the cost of managing the fund. The expense costs are minimal, typically under 1 per cent.
Gold ETFs also eliminate the challenges associated with physical storage, security, and purity verification of physical gold, but provide returns just as physical gold does, with some tracking error.
Tax Treatment: Gold ETFs are treated like regular investments in assets like stocks. If you hold gold ETFs for more than one year, any profit you make is considered LTCG and taxed at a flat 12.5 per cent. If you sell them within a year, the profit is treated as STCG and taxed according to your income tax slab.
Risks: Gold ETF's performance may slightly differ from the actual price of physical gold due to fund management costs or other factors. The trading volumes may also be low for some funds, which can make buying or selling in large quantities difficult. Also, a demat account is required to invest in Gold ETFs, which might add a layer of complexity for those who are not familiar with it.
Gold Mutual Funds
Gold mutual funds are nothing but funds of funds (FoFs) that are invested in gold ETFs. If you invest in gold mutual funds, an additional expense ratio and an exit load applies on top of the expense ratio that Gold ETFs already charge. However, gold mutual funds do come with the benefit of disciplined investment. Investors can start a systematic investment plan (SIP) in a gold mutual fund.
Tax Treatment: The tax treatment is the same as with gold ETFs.
Risks: The performance of the gold mutual funds depends on the decisions of the fund manager. Poor management can affect your returns. Although usually low, the expense ratio and exit load can reduce overall returns slightly over time.
Sovereign Gold Bonds
Sovereign Gold Bonds or SGBs combine the benefits of security, tax advantages and additional interest income. However, the government discontinued the issuance of new SGBs, as announced during the Union Budget 2025. The last series of SGBs was issued in February 2024. But if you still want to get your hands on SGBs, they can still be bought via the secondary markets.
SGBs, issued by the Reserve Bank of India (RBI), do not come with the concerns of physical storage and theft. It also has the backing of government, so it is considered relatively safe. RBI provides an additional 2.5 per cent annual interest on the initial investment, over and above any gains from gold price appreciation. Like Gold ETFs, SGBs are also traded on stock exchanges.
Tax Treatment: SGBs are completely tax-free after maturity. This means that when you sell SGBs after their maturity, which is eight years, or five years in the case of the early redemption option offered by the RBI, no capital gains tax is applied. If sold before maturity, any profit is counted as capital gains. If sold within 12 months, STGC tax applies according to the income tax slab, and if sold after 12 months, a flat 12.50 per cent LTCG tax is applied.
Risks: The only major risk associated with SGBs is a lack of liquidity. Some SGBs might have low trading volumes which might make it difficult to sell, if selling pre-maturely, at the desired price.
