#NewsBytesExplainer: What is digital gold? Should you invest?
Festival season in India is synonymous with gold sales. The demand for the yellow metal multiplies between October-December in the world's second-largest gold consumer market. In the modern world, digital assets are growing in importance. Do you know that there is a digital substitute for gold? Here, we take a look at 'digital gold,' the risks and benefits, and if you should invest.
What is digital gold?
As you can imagine, digital gold is a way of investing in the yellow metal through online channels without having to physically hold the gold. That is, you'll be the proud owner of gold but you won't have it in your physical possession. You can buy pure gold online and the seller will store an equivalent amount of gold in a secure vault.
How is it different from physical gold?
When it comes to digital gold, you can be sure that you'll be investing in 24-carat gold or 99.9% pure gold. Physical gold often faces issues of impurities. Unlike physical gold prices that aren't always consistent, digital gold will cost the same across the country. You can buy digital gold for even Rs. 1. With physical gold, the lowest denomination is often one gram.
What are the benefits of owning digital gold?
Digital gold offers high liquidity. It can be bought and sold at any time. Secondly, with digital gold, you won't have to worry about safety and storage. It will give you both peace of mind and save locker charges. Digital gold can also be exchanged for physical gold, coins, or bullion with ease. Add to that guaranteed purity and non-existence of a lower limit.
Can digital gold be used as a collateral for loans?
We just read how great digital gold is compared to its physical counterpart. But, can it be used as collateral to obtain loans from a bank? Well, of course, it can be. In 2021, Shivalik SFB partnered with India Gold to offer India's first loan against digital gold program. This is, however, an emerging sector. Therefore, there aren't many options to choose from.
Digital gold can become a better collateral
Digital gold has the potential to be a better collateral than its physical counterpart. For starters, it saves borrowers from paperwork-related hassles. As far as lenders are concerned, they can be assured of the quality of the collateral. Since digital gold is stored in secured vaults, there won't be any concerns about safety as well.
Where to buy digital gold from?
Buying digital gold is not as hard as you might think. In India, several mobile apps such as Paytm, Google Pay, and PhonePe offer digital gold products. Some banks like Axis Bank, jewelers, and brokers too offer digital gold. However, the apps, banks, brokers, and jewelers are simply platforms. Augmont Gold Ltd., MMTC-PAMP India Pvt. Ltd., and SafeGold control digital gold operations in India.
Platforms that sell digital gold partner with trading companies
Platforms that offer digital gold investments have partnered with one of the three trading companies mentioned earlier. When you buy digital gold, these companies buy gold under your name and store it in a secured vault.
What are the disadvantages of digital gold?
Digital gold is not without its own risks. To start with, there is no official body to regulate digital gold. Many platforms have a Rs. 2 lakh limit on digital gold investments. In some cases, companies only offer a limited storage period. There will be also be delivery and making charges if you want to convert your digital gold to physical.
Is digital gold taxed?
Taxation of digital gold depends on the purchase date. If the sale is within three years, the proceeds will be counted as short-term capital gain and it will be added to annual income. You'll be taxed according to your income slab. After three years, it will be a long-term capital gain. You'll have to pay 20% tax with applicable surcharge and education cess.
How to buy digital gold?
Several platforms sell digital gold. You can choose to buy the gold by either entering the amount worth or the desired weight. Now, depending on the amount of gold you're buying, you may or may not have to complete the KYC process. After payment, the amount of gold is credited to your name. You can even sell it from the platform without any hassle.
Things to remember while buying digital gold
In the absence of a regulatory body, always choose a trusted source to buy digital gold. Be aware of the 3% GST you have to pay. Know the price difference between purchase and sale or 'spread.' For digital gold, the spread is usually 2-3%. Be mindful of the time limit of investment. After the stipulated time, either sell digital gold or have it delivered.
What happens to digital gold after buyer's death?
In the event of the death of the person who purchased digital gold, the legal heir can claim the gold in the gold locker. The heir has to inform the platform or the trading company about their legal status first and can claim digital gold.
