Physical vs Digital Gold - Which is better for investing?

1. Introduction

Gold has traditionally been a go-to safe-haven asset in India, often moving opposite to equities. It is seen as a hedge against uncertainty, inflation, and currency fluctuations. Gold’s rupee value has grown at ~14.5% CAGR in the last 15 years, and in the long run beaten inflation.

For Indians, gold carries a deep cultural value - From auspicious purchases on Dhanteras to family heirlooms passed down generations, we have long treasured gold. This blurs the line between investment and personal use.

Beyond physical gold, new “digital” avenues have emerged like Gold ETFs, App-based digital gold, etc. These options retain gold’s benefits as an investment asset class while mitigating issues of storage, security, transaction cost, etc.

In this article, we will navigate through these options, discussing their pros & cons, which should help you get a clearer view of which gold investment format fits your needs.

2. Physical vs Digital Gold

		Pros	Cons	Point of View
Jewellery, Coins, Bars		Tangible asset with sentimental value Easy to acquire & liquidate - No lock-ins, No demat account required Easy to pledge - RBI allows only physical gold / silver as collateral for gold loans	High cost of acquisition - 5-30% making charges, 3% GST, 3-5% deduction on liquidating in cash  Storage & security cost	Physical gold, esp jewellery, is more of a consumption item rather than an investment.
Gold Savings Scheme [Physical Gold]	Monthly gold savings schemes from jewellers	Instills disciplined savings, akin to a SIP for gold Bonus is non taxable - Typically adjusted as discount on jewellery purchase	Bonus is not truly “interest” & may not even offset making charges Lock-in with the jeweller, adverse redemption / bonus terms	Useful only for a planned physical gold purchase in the future. We advise assessing the jeweller’s credibility & reading the fine-print.
Gold ETFs [Digital Gold]	Open-ended MFs that track the price of physical gold, and are traded on stock exchanges like shares	SEBI regulated - Security of both quality & accountability of holdings Low cost of acquisition - Very low TER (~0.5%), no entry or exit loads, no lock-ins, and no STT Gold FOFs are accessible without demat accounts	Limited Pledging Options - Can be used for collateral margins for trading. Note: RBI does not allow digital gold as collateral for gold loans. Buying & selling restricted to market hours only	Gold ETFs are the best (and the most secure) way for investing in gold as an asset class, and it integrates easily with and helps diversify your investment portfolio.
App-based Digital Gold	Fintech platforms offer options to purchase physical gold, stored on your behalf in secure vaults, against which online certificate of ownership is issued	Ease of acquisition - Ultra low minimum investment, Purchase anytime Security of storage, till you take physical delivery	Not Regulated by RBI / SEBI - Risky!!! Non transparent pricing with hidden costs, terms & conditions Cannot pledge, even for collateral margins (unlike Gold ETFs)	Until this is brought under regulatory oversight, we advise staying away from app-based digital gold. Note: SEBI has barred IAs & brokers from selling digital gold.
Sovereign Gold Bonds	Introduced by GOI as a 8-year maturity bond as alternative to holding physical gold	No Default Risk - Issued by Government of India / RBI 2.5% annual interest as extra income Tax friendly - No capital gains if held till maturity	5 year lock-in Not available from 2025 - GOI has discontinued fresh issuance of SGBs.	As new SGBs are no longer available, Gold ETFs (or FOFs) are the best way of investing in gold as an asset class.

3. An Illustration

Let us take an example of 2 investors who have invested in gold for a 5 year period - Person A purchased a 24Kt 10gm piece of jewellery, and Person B invested the same amount in a Gold ETF. 

As we can clearly see below, Person A has lost significant returns owing to making charges, GST & deduction on liquidating.

Person A - Gold Jewellery (24Kt 10gm)

	Gold Price	Additional Charges	GST	Final Paid / Redeemed
Purchased on 1st April 2020	₹42,766	₹8,553	₹1,540	₹52,859
Sold / Redeemed on 1st April 2025	₹93,658	₹2,810	₹84	₹90,764
Net Return				₹37,905 72%

Person B - Gold ETF

(* UTI Gold ETF for illustration only).

	Gold Price	Price	# Units	Final Paid / Redeemed
Purchased on 1st April 2020	₹42,766	₹39	1,366	₹52,859
Sold / Redeemed on 1st April 2025	₹93,658	₹77	1,366	₹105,308
Net Return				₹52,449 99%

Note:

1. Standard 20% making charge on jewellery purchase, 3% deduction on liquidating in cash (instead of exchanging with new jewellery pieces), and 3% GST has been applied above. These charges are not applicable for Gold ETFs, as TER is already accounted for in the price.

2. Additional charges of maintaining a locker for security of jewellery, and demat account for Gold ETF has not been accounted for above.

3. Taxation is the same for both physical & digital gold, hence only pre-tax returns have been demonstrated above. Sale of gold held for less than 2 years attracts STCG at applicable Income Tax slab rates, and LTCG (without indexation) if held beyond 2 years.

5. Conclusion & Key Takeaways

There is no one-size fits all - The best way to invest in gold depends on your goals, time horizon and preferences. Physical gold, esp jewellery, is more of a consumption item (personal use / gifting / etc) than an investment. Gold ETFs not only offer better returns than physical gold, but also integrate easily with and help diversify your investment portfolio.