9 Mins

Introduction

Gold is a go-to investment for Indians. Be it gold jewellery, gold coins, or biscuits, gold is consumed in every form. Every auspicious occasion is marked with the purchase of gold. With the entire world moving towards digitalization, gold in digital forms has been gaining popularity. This article covers digital gold vs physical gold in detail.

What is digital gold investment?

An alternative to physical gold is digital gold. In India, digital gold can be bought from multiple apps and websites. However, it is offered only by certain companies, namely, Augmont Limited, a joint venture between state-owned Metals and Minerals Trading Corporation of India (MMTC), Produits Artistiques Métaux Précieux, Switzerland (PAMP) and SafeGold brand of Digital Gold India Pvt. Ltd.

Investing in digital gold is considered to be a cost-effective and efficient way of investing in gold. Each unit of digital gold is backed by 24K 99.9% purity gold. One can buy gold with an amount as low as INR 100. The purchase and sale happens online at market prices. Hence ensuring complete transparency in the transaction.

To invest in gold doesn’t involve additional storage and carrying costs. Investors need not worry about the safety of gold stored by the trading companies in a safe vault in the investor’s name. When an investor purchases a unit of digital gold online, the trading companies check the purity of the gold and place it in the vault in the investor’s name. Once the investor sells it, the trading company removes the gold from the vault. Investors can take physical delivery of gold upon redemption.

However, this form has its own sets of drawbacks. The trading platforms charge 2%-3% as a management fee, storage costs and insurance. Also, there is no regulatory authority for digital gold platforms to secure the interest of consumers. Moreover, digital gold investment doesn’t offer passive income to its investors. However, digital gold is more convenient and cost-effective than physical gold. The other form of digital investment is mutual fund (ETF) and  sovereign gold bonds. The gold bonds are issued by the government. 

Benefits of investing in digital gold

Following are the benefits of investing in digital gold:

  • Invest small amounts: Investors may invest small amounts of money in digital gold. There are no restrictions or minimum purchase limits. Hence one can consider digital gold for small investments. 
  • Quality: Investors will only possess 24 karat gold, and the quality will not be compromised. As a result, they do not have to be concerned with protection or purity.
  • Redemption: These can be quickly and easily redeemed. The redemptions can be in physical gold coins or bars. Also, one can cash out their investment without any hassle. One can easily buy and sell the units. 
  • Loan against digital gold: The investment can be used as collateral for loans.
  • Safety: The digital gold assets are insured and securely deposited in a vault. As a result, the risk of robbery is eliminated. The responsibility of the gold lies with the seller.
  • Track investments: Investors can easily track their investments through online platforms (apps or websites). Furthermore, they can easily assess their investment’s performance and gain better insights.
  • Portfolio diversification: It is a good investment option for portfolio diversification and is also a good asset for hedging.
  • Real-time rates: The digital platforms offer real-time gold rates. Therefore, the investor can take advantage of the price movements and make purchases.

What is physical gold investment?

Investing in gold is one of the most preferred and favoured investment options in India. This yellow metal has only seen increasing demand over the years. Gold is usually bought for consumption purposes. It is purchased in the form of jewellery, gold coins and biscuits. It can be bought directly from a jeweller or a bank with no involvement of an intermediary. Hence there is no counterparty risk.

Usually, the purchase of gold is kept confidential, unlike other forms of investment. However, it is recommended that one keeps all the purchase receipts safely for income tax purposes. The minimum investment in physical gold is high. For example, gold biscuits are available in a minimum quantity of 10 grams. Therefore, buying physical gold has a higher minimum investment than digital gold. Anyone universally accepts gold in exchange for cash. Hence it can be liquidated anywhere in the world. However, the price of gold varies from dealer to dealer. The resale value is lower than other forms of gold investment.

Capital gains from investment in physical gold are taxable as per the holding period of the investment. If the gold is sold before the completion of 36 months, then the gains are taxable as per the income tax slab rates. If the gold is sold after 36 months, then the long term capital gains tax of 20% with indexation benefit is levied. Moreover, there is a cess of 4% and surcharge if applicable.

Investing in physical gold has its own drawbacks. The cost of carrying and storing gold is higher. Additionally, physical gold will have high making charges. Moreover, there is always a risk of theft. For purchases above INR 30 lakhs, buyers have to pay a wealth tax.

Benefits of investing in physical gold investment

Following are the benefits of investing in physical gold:

  • Gold has been the most desired and prized precious metal. The appetite to possess this metal has only been increasing in the past.
  • Gold is considered to be an inflation-proof investment. For example, one can purchase gold today with the money they have. In the future, they can sell it and recoup the changes.
  • Gold never loses its intrinsic value. History proves that metal has always been in demand. Even during a crisis, one can easily sell the asset.
  • Investors can pledge their physical gold and avail loans against them.
  • One can pass on their physical gold to the next generations.
  • Gold doesn’t depreciate over time like many other assets.

Digital Gold vs Physical Gold. Which is better?

Following are the differences between digital gold vs physical gold

ParametersPhysical GoldDigital Gold
MeaningPhysical gold’s purity may or may not be 99.5%.Purity is guaranteed.
PricePhysical gold prices are not uniform.Digital gold prices are uniform across the country.
InvestmentGold biscuits or coins are available in the standard denominations of 10 grams. Hence, it requires a huge investment to invest in physical gold.One can buy and sell gold by weight or by fixed worth.
CostBuying gold jewellery involves paying 20% – 30% of the gold’s total value as making charges.3% GST is charged on digital gold purchases.
StorageOne has to safely store the gold in a locker or at their home. Chances of theft and loss are high.The seller stores the digital gold in the investor’s name in a secure locker—no chance of theft or loss.
TaxationGains from a gold investment held for less than three years are taxable as per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.Gains from gold investments held for less than three years are taxable as per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit.
LiquidityOne can easily buy physical gold from any bank or jeweller. However, they can be exchanged through a jeweller.One can redeem digital gold as coins and bullion or cash out the investment.

Conclusion

Both digital gold and physical gold have pros and cons. However, the choice of investment depends on the investor. If the sole purpose of purchasing gold is for investment, one can invest in digital gold instead of physical gold. However, digital gold is not regulated and has a limit on the maximum number of years one can hold it in digital form. In these cases, one can prefer other forms of digital investments, for example, sovereign gold bonds and gold ETFs Exchange Traded Funds (mutual funds). On the other hand, physical gold is good for consumption and is not advised for investment purposes.

Be it digital gold or physical gold, an investment portfolio with around 10%-20% of gold is considered healthy. This helps in diversification of the portfolio and also hedges against volatility, currency risk and inflation risk.

Frequently Asked Questions

Should you prefer physical gold or digital gold?

Physical gold should be preferred when one wants to use it for consumption in the form of jewellery. Else, digital gold is considered as a better option as it ensures safety and has no additional storage costs. However, digital gold vs physical gold has its own pros and cons. Therefore one should consider all the parameters before buying physical and digital gold.

Where can I buy digital gold?

To invest in gold one can visit any of the online platforms that offer digital gold. In India, Paytm, Google, Pay, HDFC Securities, Motilal Oswal etc offer digital gold. One can enter the amount of gold in grams or in value and purchase it after completing the KYC process.

Is it better to own physical gold?

Physical gold is mostly used for consumption in the form of jewellery. If an investor wants to buy gold only for the purpose of investing, then buying physical gold is not advised. 

Is Gold ETF better than physical gold?

Gold ETFs and physical gold are different forms of investing in gold. Both lead to the same end goal of diversifying the portfolio. However, both differ in terms of safety and liquidity. While Gold ETFs are safer, physical gold is universally accepted. Physical gold is very liquid when compared to all other forms of gold. In Gold ETFs (mutual funds) buying and selling is more transparent. At the same time, physical gold involves no counterparty risk. Hence it is important for investors to consider their needs and goals before choosing one form of gold as an investment.