What is Digital Gold? What Are Its Advantages? Should One Invest?

Since last year as Covid-19 pandemic hit, gold prices rallied to historic highs that encouraged more investors to invest in the precious metal. People who are not familiar with the different avenues of investment in gold gradually became interested in the same. So, if you are one of those looking to invest in the precious metal, you must be sure about the vast opportunities and options in the investment, and its benefits. Additionally, before going into the discussion of gold investment, an investor should always consider that what is the particular purpose behind it. If someone is looking for an ornament, then this is gold jewellery, but if someone is looking for more profit or return out of it - then digital gold is certainly a better option than gold coins or other physical gold options. Here is a discussion about what digital gold is, and should one choose it or not.

What is Digital Gold and how is it different?

Digital gold is nothing but a 24 carat 99.9% pure gold investment without the burden of storage. It is invested through online mode via internet banking or UPI transaction. The money is paid online and the seller provides a digital invoice of the aforesaid purchase within 5 minutes. When somebody purchases gold in digital form, the company will stock it in its facilities at secured vaults, which relieves the investor of any chance of theft. In the case of physical gold, if the investor is not buying hallmarked gold jewellery, there will be no certainty about the metal's purity. It will not be a problem for digital gold, as these are certified by government-licensed agencies.

Advantages

There are few other similar options where no storage costing is required like, Sovereign Gold Bond (SGB). So, where is digital gold different from them? One can invest in digital gold with a very minimum amount of money, which is unlikely for the precious metal. An investor can start buying with even Re. 1 here and can sell the unit/s at any time from anywhere.

The investor can also sell the gold any time from the same platform. After the selling request is confirmed, the unit/s of gold will be debited from the account and the net sale value will be credited there within 4 hours. For physical gold, the investor will have to travel to jeweller, but digital gold provides the opportunity of hassle-free immediate liquidity. Additionally, in India, the RBI issues a certain timeline for buying SGB from the government, but in the case of digital gold, one can buy or sell it any time from anywhere via internet transaction. So, it has that additional benefit of convenient instant purchase or sale.

Disadvantages

In the case of digital gold, the current gold price will be tagged with 3% GST just like physical gold investments, although no making charge will be added there. But for SGB, there will not be any GST charge. For example, as somebody purchases Rs. 100 worth gold, it will be charged as Rs. 103 with the additional GST. But the problem is, at the time of sale, the base price will be around Rs. 97 because of the spread cost or multiple additional costs like - storage cost and insurance cost, etc., and this charge might vary from 3%-6%. Additionally, there will be no option for indefinite holding in digital gold, either it will have to be sold or delivered physically, after some time.

With digital gold, capital gain tax is added, when it will be sold by the investor. In case of less than 36 months investment or holding it will come under the Short Term Capital Gain (STCG) tax, under 'Income from Other Sources' and taxed as per the buyer's income tax slab. In case of more than 36 months holding, it will come under the Long Term Capital Gain (LTCG) tax at 20% (with the indexation benefit), with cess and surcharge. So, for a very small amount of investment, this might not matter hugely, but in the case of large investment, this will certainly be a disadvantage.

However, after investing, if the buyer feels a need for physical delivery of that particular gold, the making charges and delivery costs will be charged. Otherwise, if the investor feels to sell the digital gold to some other buyer, as the market price goes up, no extra cost (other than capital gain) will be tagged with the profit. The current gold rate in India depends on various factors like international gold prices, customs duty, exchange rate, etc.

From where to buy?

By using UPI ID one can buy digital gold from Google pay or Phone Pe. In the case of Google Pay, the purchased gold is stored with 100% insurance by MMTC-PAMP. From any app the investor can buy digital gold as the app does not sell the gold, rather companies like MMTC, SafeGold, and Augmont can sell and store it. Among these three of them, MMTC-PAMP is a joint venture between India's MMTC (a government of India undertaking) and Switzerland's PAMP SA (bullion brand). The latter two are private companies. It should be noted that SEBI or RBI does not regulate these companies. Additionally, through internet banking, one can buy digital gold from the banks' websites or apps.

During systemic risk and at the time of high inflation, gold is recommended to diversify the portfolio. In the last year, gold prices have gained around +28.2% in India. Hence, if the buyer is not looking out for any ornament, digital gold will be a better investment option than jewellery, with any range or amount of investment.