Gold ETF, digital gold, or SGB: which one you actually own and what you actually pay
Three ways to own gold without a locker. Each has different costs, lock-ins, tax treatment, and — critically — different answers to the question 'what happens if the platform shuts down.'
Gold in India is not just an investment. It is insurance, ritual, and identity. The question is no longer whether to own some — most families do — but how. Physical gold has storage costs, making charges, and purity risk. The digital alternatives remove those, but replace them with a different set of costs and risks that are less visible.
The three options, side by side
| Feature | Sovereign Gold Bond (SGB) | Gold ETF | Digital Gold (apps) |
|---|---|---|---|
| Issuer | RBI, on behalf of Government of India | Asset Management Companies | Private companies (MMTC-PAMP, Augmont, SafeGold) |
| Underlying | Government obligation to pay gold price | Physical gold held by custodian | Physical gold held by vendor |
| Minimum investment | 1 gram (~₹7,800) | 1 unit (~₹70–₹800) | ₹1 (fractional grams) |
| Lock-in | 8 years (exit after 5) | None | None |
| Annual interest | 2.5% on initial investment | None | None |
| Expense ratio | None | 0.3%–0.8% per year | 2%–3% spread (buy/sell) |
| LTCG tax (at maturity) | Exempt if held to maturity | 12.5% after 1 year | 20% with indexation (varies) |
| Liquidity | Listed on exchange, but thin | Exchange-traded, very liquid | Instant, but at vendor's price |
| Counterparty risk | Government of India | AMC + custodian | Private company |
SGB: the best deal, if you can wait
Sovereign Gold Bonds are the most tax-efficient way to own gold in India. The RBI issues them in tranches, priced at the prevailing gold rate. You get:
- 2.5% annual interest, paid semi-annually, on the initial investment. No other gold instrument pays interest.
- Zero capital gains tax if held to the 8-year maturity. Even on early exit after 5 years, LTCG is available with indexation.
- No storage, no making charges, no expense ratio.
The catch: liquidity. SGBs are technically listed on exchanges, but trading volumes are thin. On many days, you cannot sell at a fair price. The 8-year lock-in is the real commitment — and for someone who might need the money in three years, it is a dealbreaker.
SGBs are ideal for the portion of gold allocation you intend to hold for a decade or more — which, for most families, is the bulk of it.
Gold ETF: liquid and transparent
Gold ETFs hold physical gold in a custodian vault. You buy and sell units on the stock exchange like a stock. They track the gold price closely, with a drag of 0.3% to 0.8% per year (the expense ratio).
The advantages over SGBs: instant liquidity at market price, no lock-in, and the ability to buy and sell in quantities as small as 0.01 gram.
The cost: the expense ratio compounds. Over ten years, a 0.5% annual drag on ₹5 lakh of gold is about ₹28,000 — the equivalent of the 2.5% annual interest that an SGB would have paid you. The ETF costs you what the SGB earns you.
Gold ETFs are the right choice for tactical allocation — money that might need to move in one to three years — or for anyone who cannot commit to the SGB lock-in.
Digital gold: easiest to buy, hardest to trust
Apps like PhonePe, Google Pay, Paytm, and Groww let you buy "digital gold" from ₹1. The gold is sourced from MMTC-PAMP or Augmont, stored in their vaults, and redeemable for physical delivery or cash.
The convenience is unmatched. The costs are not:
- Buy-sell spread of 2% to 3%. You buy at ₹7,800 per gram and can sell immediately for ₹7,550 to ₹7,600. This is the platform's margin, and it is charged on every transaction — far more expensive than an ETF's expense ratio over a holding period of more than a year.
- No SEBI regulation. Gold ETFs and SGBs are regulated by SEBI and RBI respectively. Digital gold is not regulated by either. The vendor's promise to store your gold is contractual, not statutory.
- Platform risk. If the app or the gold vendor shuts down, your claim is against a private company, not a government or a regulated custodian. This has not happened yet with a major provider, but the regulatory gap means there is no mandatory segregation, no insurance requirement, and no investor protection framework.
Digital gold works for very small, impulsive purchases — the "buy ₹500 of gold on Dhanteras" use case. For any amount you take seriously, move it to an SGB or ETF.
The return comparison
Gold has returned roughly 10% to 12% CAGR in INR terms over the last twenty years, driven partly by gold's dollar-price appreciation and partly by the rupee's depreciation. After costs:
| Vehicle | Gross return | Net return (after costs/tax) |
|---|---|---|
| SGB (held to maturity) | Gold return + 2.5% interest | Gold return + 2.5%, tax-free |
| Gold ETF | Gold return | Gold return − 0.5% expense − 12.5% LTCG |
| Digital gold | Gold return | Gold return − 2.5% spread − 20% LTCG |
Over ten years on a ₹5 lakh allocation, the difference between SGB and digital gold can be ₹1.5 to ₹2 lakh — enough to matter.
How much gold to hold
Most financial advisors suggest 5% to 15% of a portfolio in gold, as a hedge against equity downturns and rupee depreciation. The Permanent Portfolio model suggests 25%, but that is aggressive by Indian standards where real estate already provides non-equity exposure.
For a ₹50 lakh portfolio, 10% in gold is ₹5 lakh. Put ₹3 to ₹4 lakh in SGBs (long-term core), ₹1 lakh in a gold ETF (tactical and liquid), and ignore digital gold unless you are gifting ₹500 on an app.
Published by FinClamp. This guide is information, not financial advice — see the disclaimer.