Digital gold fever: As prices soar, ETFs may offer a smarter bet this Dhanteras

The gold rush is back. From PhonePe and Paytm expanding their gold offerings to startups like Gullak raising significant funding rounds and Jar pursuing vertical integration, digital gold platforms are multiplying rapidly.

The timing isn't coincidental; gold prices have surged dramatically, climbing from Rs 1.12 lakh per 10 grams of 24-karat gold in mid-September to nearly Rs 1.35 lakh ahead of Dhanteras. The rally has been so sharp that gold smuggling has reportedly increased ahead of the festive season, according to multiple media reports.

But for buyers primarily focused on investment returns rather than eventual physical possession, gold ETFs are the more cost-efficient choice.

Digital gold purchases attract a 3% GST—identical to the levy on physical gold coins and bars—which is non-recoverable. This is separate from any spread or platform charges. While readymade gold jewellery also carries a 3% GST, which includes both the gold price and the making charges, custom-made jewellery can attract an additional 5% GST to the making charges, along with a 3% GST on the value of the gold.

Additionally, digital gold, which is treated like physical bullion for tax purposes, attracts a flat 12.5% long-term capital gains tax after 24 months of holding, with indexation benefits removed. Holdings under 24 months are taxed as short-term capital gains at slab rates.

Gold ETFs also attract long-term and short-term capital gains taxes. However, since they are classified as securities rather than goods or services, they don't attract GST on purchase. Investors do bear GST indirectly through the scheme's expense ratio, but this is a running cost measured in basis points rather than an upfront 3% charge. Securities Transaction Tax also doesn't apply to gold ETFs.

Right now, most digital gold platforms don't charge a processing fee to attract new customers. Any shortfall is subsidised by gold refiners who pay sales commissions to digital gold apps.

Digital gold requires no demat account, while gold ETFs need KYC compliance similar to other mutual funds.

However, digital gold platforms have carved out a distinct user base. Many target gold enthusiasts plan to eventually convert their holdings into jewellery anyway, for whom the GST becomes less relevant, since physical jewellery carries the same tax treatment, according to executives of digital gold companies. The platforms also appeal to less savvy investors who find financial instruments such as ETFs intimidating.

Operational caveats

Digital gold startups typically offer instant or near-instant conversion into physical gold delivery, while ETFs require more extensive paperwork and processing time for physical redemption, assuming the fund even offers that option, as many don't.

Silver has experienced similar price pressures. Several mutual funds, including Groww's silver ETFs, have paused subscriptions due to shortages in physical silver supply.

While gold ETFs haven't faced similar disruptions yet, the silver precedent raises questions about potential constraints if the rally intensifies further.