EVALUATING INVESTMENTS IN DIGITAL GOLD

Jigar M. Patel
International Tax Attorney

What are Gold ETFs?

A Gold ETF (Exchange Traded Fund) is a financial product designed to track the price of gold, offering an easy way to invest in the precious metal, without the need for physical storage. It is a passive investment instrument that trades on stock exchanges like a company share. It is essentially a scheme that invests in gold bullion of high purity (typically 99.5%), allowing investors to buy or hold gold digitally through a DEMAT account.

Gold ETFs offer a smart, secure, and cost-effective way to gain exposure to gold prices without the hassles associated with owning physical bullion.

Valuation of Gold ETFs?

The value of the gold ETF is directly linked to the price of gold. For example, if the gold price increases by 2%, the value of gold ETF is likely to rise by a similar amount. Moreover, like other stocks, one can buy and sell shares of ETFs on the exchange, allowing for a convenient short-term and long-term strategy for investment into gold.

Investment features & highlights

• No storage hassle or storage costs (like locker charges) as in case of physical gold.
• The gold is of certified high purity (99.5%), removing concerns about quality and making charges, as in case of jewellery.
• Can be bought and sold easily on a stock exchange at market prices throughout the trading day, offering far greater liquidity than bars or coins.
• No lock-in period of 8 years as in the case of Sovereign Gold Bonds (SGBs), providing greater flexibility for investors

Taxation of Gold ETFs

During the period between April 1, 2023 and 31^st March, 2025, any capital gains arising from Gold ETF, irrespective of the holding period, were taxable as deemed short-term capital gains (STCG), liable to tax at applicable income-tax slab rate in the case of the investor.

However, effective 1^st April, 2025, the taxation of Gold ETFs has undergone rationalisation and long-term capital gains (LTCG), computed on the basis of period of holding of more than 12 months, are taxed at the flat rate of 12.5%, plus surcharge and cess, as applicable. It needs to be noted that the benefit of indexation is no longer applicable for computing LTCG. Tax on STCG on Gold ETFs continues to be applicable as per the income-tax slab rates of the investor.

Distinction between Gold ETF and Gold MF

Gold ETFs are traded like stocks and track the price of gold directly, while Gold Mutual Funds (MFs) invest in a mix of Gold ETFs and other gold-related instruments. Gold MFs, also include thematic gold funds, that invest in companies involved in gold mining or processing, whose returns depend on business performance, rather than gold prices alone.

It needs to be borne in mind that while Gold ETF requires buying atleast one unit, which equals the price of one gram of gold (currently more than Rs.10,000), an investor can start a Gold MF SIP with just Rs.100 to Rs.500.

While the tax rates on LTCG and STCG in case of Gold MFs and Gold ETFs are the same, there is a difference in the criteria of the holding period. While Gold ETFs require a 12-month holding period for LTCG, in case of Gold MF the prescribed period for the same is 24 months.

Comparison of Gold Investments