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Gold is a go-to investment in India. The yellow metal is an asset that is considered very auspicious. However, in recent years, the government has introduced alternatives to physical gold in the form of Gold ETFs and sovereign gold bonds. This article covers Physical gold vs Gold ETF in detail.

What is Gold ETFs Exchange Traded Funds?

Gold Exchange Traded Funds are mutual funds that invest in gold bullion and track gold’s domestic prices. They are backed by gold with a purity of 99.5%. Gold ETFs is in dematerialised format and are an alternative to physical gold.

One unit of Gold ETF is equivalent to one gram of gold, and hence the minimum investment is one gram of gold. The mutual fund trades on the stock exchanges, hence giving investors an opportunity to get exposure to gold and participate in the market. Gold ETFs are listed on exchanges in India as well as globally too. Hence one can purchase and sell their ETFs on exchanges like NSE and BSE.

One can trade in these ETFs using a trading and demat account. Hence the purchase and sale happen in terms of cash and not gold. The prices of gold ETFs are the same across India, and hence there is complete transparency while transacting in them. These funds come with an expense ratio of a maximum of 1%. Also, there are additional expenses, like brokerage and transaction costs. Few Asset Management Companies (AMCs) allow investors to redeem their Gold ETFs in terms of gold. Provided the investor holds ETFs worth 1kg of gold and in multiples thereof.

Gold ETFs are highly liquid as they trade on the stock exchange. Moreover, since they are in a dematerialised format, there is no risk of theft and no additional storage costs.

Check: Gold Rates Today 27 May 2024

ETFs are available at uniform prices all over India, unlike physical gold, which varies from dealer to dealer.

Returns from Gold ETFs are taxable based on the holding period of the investment. In the short term (before completion of 3 years), the capital gains are taxable at the investor’s income tax slab rates. In the long term (after three years), the long term capital gains are taxable at 20% with indexation benefit and 10% without indexation benefit.

From 1st April 2023, capital gains from gold ETF investments will be taxable as per the investor’s income tax slab rate. There is no LTCG benefit.

Benefits of Gold ETFs Exchange Traded Funds

The following are the benefits of investing in gold ETF:

  • Simple and Open Trading: A Gold ETF’s minimum investment is one unit, which is equal to one gram of gold. Gold ETFs can be bought and sold on the exchange, and the rates are open to the public.
  • Smooth Transactions: During market hours, one can buy and sell gold ETFs on the stock exchange. As a result, it is as easy as stock trading. Furthermore, the ETF’s price doesn’t change by differences in local prices, GST, or any other taxes.
  • Hedge against inflation: Gold is a good way to protect one’s wealth from inflation and currency fluctuations.
  • Secure: In comparison to physical gold, gold ETFs are a secure and simple investment choice. Individuals don’t have to think about storage, fraud, theft, or having to pay extra for a locker or making charges.
  • Inexpensive: Gold ETFs have no entry or exit loads. Brokerage and fund management fees are the only expenses of gold ETFs.
  • Portfolio Diversification: Gold ETFs are a smart way to diversify one’s portfolio. They aid in risk reduction during uncertain or unpredictable market conditions.
  • Loan Collateral: Investors may use their Gold ETFs as collateral to get a loan from a financial institution.

What is physical gold investment?

Gold is among the most preferred forms of investment in India. It is an asset that comes with emotional and social value. In India, the purchase of gold happens in the physical form of gold coins, bars, jewellery, and gold biscuits. And most of the time it is for consumption.

One can purchase gold directly from banks, or jewellers, or any dealers. There are no intermediaries and contracts. Hence buying physical gold has no counterparty risk. Gold can be liquidated easily anywhere in the world in return for cash. It is a universally accepted asset and can be used anytime in case of emergency. Though the purchase of gold is usually kept confidential, it is good to store all the bills and receipts for the purpose of income tax.

The tax on capital gains from gold depends on the holding period of the asset. Suppose the gold is sold before the completion of 36 months from purchase. In that case, the STCG are taxable at the individual’s income tax slab rates. If the gold is sold after 36 months from the purchase, then the long-term capital gains are taxable at 20% with indexation benefit and 1-% without indexation benefit.

If an investor converts physical gold to electronic gold receipt or vice versa then it is not considered as a transfer. hence, no capital gain arises. This change has been introduced with Budget 2023.

Investing in physical gold comes with its own disadvantages. The minimum investment is usually high as gold biscuits come in 10 grams, after buying gold, the risk of it being stolen increases. And to safeguard it, one has to spend on safety lockers. This increases the storage and carrying costs.

With jewellery, the making charges tend to be on the higher end. When one purchases gold, there is no guarantee of purity. Also, the price of gold varies from dealer to dealer. If one purchases gold worth more than INR 30 lakhs, a wealth tax is levied on it. Also, the resale value of gold is much lesser than a sovereign gold bond or gold ETF.

Benefits of investing in physical gold

Following are the benefits of investing in physical gold:

  • Take physical possession: Investors can hold investment in physical form. They can be in ornaments form, bars or coins. Hence it is one of the most secure investments.
  • Emergency: In case of a market or economic crash, the value of an asset may vanish, while the physical gold that you hold still remains. Therefore, it protects the investor during an emergency. Gold ETFs won’t offer advantages that physical gold offers in case of unforeseen political and social catastrophes. Physical gold offers ‘financial insurance’.
  • Inflation and currency depreciation: Gold investments help in protecting wealth against inflation and currency devaluation.
  • Complete control over wealth: Holding physical gold helps investors to decide when to buy and when to sell. The investor holds the responsibility towards the asset. Hence the complete control lies with the investor.

Physical gold vs Gold ETF Which is better?

The table below explains physical gold vs gold ETF:

ParametersPhysical GoldGold ETF
MeaningPhysical gold’s purity may or may not be 99.5%.Gold ETFs is open-ended exchange-traded funds that invest in traditional gold bullion (gold with 99.5% purity). An investor owns units of an ETF whose value is determined by the market price of physical gold.
PricePhysical gold prices are not uniform.Pricing is uniform as per international standards and is always transparent.
InvestmentGold biscuits or coins are available in the standard denominations of 10 grams. Hence, it requires a huge investment to invest in physical gold.Gold ETFs are bought in units, and 1 unit of ETF is equal to 1 gram of gold. Therefore, these are an affordable option for investors.
CostBuying gold jewellery involves paying 20% – 30% of the total value of the gold as making charges.Gold ETFs have an expense ratio of 1% and brokerage charges around 0.5% or less.
Wealth taxIf an individual possesses more than INR 30 lakhs worth gold, then they are liable to pay 1% wealth tax.No wealth tax.
TaxationGains from a gold investment held for less than three years are taxable as per the individual 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 an investment sold before three years (short term) are taxable at the investors’ income tax slab rates. Suppose the investments are sold after three years (long term). In that case, the capital gains are taxable at 20.8% (including cess) after indexation benefits. And at 10% without indexation benefit.
From April 1st 2023, capital gains from Gold ETFs will be taxed as per the investor’s IT slab rate, irrespective of the holding period.
LiquidityOne can easily buy gold from any bank or jewellers. They can be exchanged through jewellers anywhere in the world.Gold ETFs trade on the stock exchanges, and hence buying and selling is as easy as trading equities.
ReturnsActual return = Current market price of gold minus (buying price and making charges).Actual return = Current trading price of a gold unit on the exchange minus (buying price and brokerage charges).
Demat AccountNot requiredDemat account is compulsory to invest in ETFs.

You may also like to read about the Physical Gold vs Sovereign Gold Bond


Gold is the most coveted commodity and asset all over the world. It is used as a standard against currency for ages now. This yellow metal’s demand has only seen a surge in the past. Even today, gold in every form is becoming popular. Physical gold or Gold ETFs have only seen rising demand as this is the only asset that has continuously given returns above the inflation rate. Hence making it a perfect hedge against inflation.

Both physical gold and Gold ETFs have their own set of pros and cons. While digital gold is safer, physical gold is universally accepted. It is very liquid in comparison to all other forms of gold. Gold ETFs is more transparent when it comes to transacting. 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.

Financial experts’ advice that an investment portfolio should have around 10%-20% in gold. It can help diversify the portfolio and acts as a hedge for inflation risk, currency risk and market volatility.

Read also about the Digital Gold vs Physical Gold

Read also about the Gold ETF vs Sovereign Gold Bond

Frequently Asked Questions

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 in comparison to all other forms of gold. Gold ETFs are purely for investment purposes. While physical gold is for both investment and consumption. 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 individuals to consider their needs and goals before choosing one form of gold as an investment.

Why are gold ETF prices different from physical gold?

The price of a Gold ETF is based on the demand and supply of the ETF on the stock exchange. Whereas, the price of physical gold differs from dealer to dealer and also based on the location. Also, one can purchase Gold ETFs on the exchange hence there are no additional making charges and other taxes. Whereas physical gold involves making charges and moreover, one will have to pay extra for storage and carrying costs. Therefore there is a difference in the price of Gold ETFs and physical gold.

Should I buy gold ETF gold?

Gold ETFs is an alternative to buying physical gold like sovereign gold bonds. They are solely for the purpose of investing and not consumption. They are backed by the gold of 99.5% purity and hence one need not worry about the purity of gold. Gold ETFs eliminate any additional costs like storage and carrying costs. Moreover, it is safer than buying physical gold. If the sole purpose of buying gold is to invest, then one can consider investing in ETFs.