The Basics of Digital Gold

The Basics of Digital Gold

Is Digital Gold really a safe investment? How’s it different from the age-old physical gold we’ve been seeing over the years? #Upstox is here to answer all such questions. This educational video will explain to you the exact significance of Digital Gold.


Hello and welcome to our new series - Learn With Upstox. Here, we’ll try to make investing easy and simple. Whether you want to invest in IPOs, Mutual Funds, Digital Gold, Stock market or Real estate, don’t worry because we are going to discuss about all these topics here. 

And in this article, we are going to discuss - The Basics of Digital Gold.

We will try to find the good and bad points in physical as well as digital gold. We will talk about which is a good investment and I will also tell you how you can buy gold at 6 - 7% less than the market price. 

These days you must have seen that a lot of apps as well as blogs will try to sell you digital gold. They will all say that it’s a good idea to invest in it. But, in this case, what do you do?

Well, I have a simple thumb rule for this. Do not buy what is hard sold to you. 

We will discuss everything in depth, but let’s first start with Physical Gold and try to understand why someone would invest in it? What are it’s pros and cons? And what was the need to come up with Digital Gold?

Investing in Physical Gold

Physical gold is a good investment if you want Gold in the form of jewellery. 

But did you know that you almost pay 10 - 15% more for physical gold as making charges. Which means that if you buy Rs 50,000 worth of gold, you will most likely pay almost Rs 60,000 because of added making charges. And not only that, you also have to pay an additional 3% as GST.

There are some more disadvantages like:

  • The risk of theft and impurity in physical gold
  • You have to pay melting charges while selling reduces its value and lowers it than the actual value
  • You cannot buy physical gold in small quantities. You cannot invest only 100 or 500rs. You have to buy a minimum of 1 gram which costs around 5000rs.
  • No regular income. You can only make profits if you actually sell it at an increased price but not as a monthly or annual interest.

We just saw why physical gold isn’t a very good investment. Now let’s take a look at digital gold.

Investing in Digital Gold

Let’s look at how digital gold makes up for the cons in physical gold and this way we’ll also be able to understand what digital gold actually is.

Let’s talk about safety first. 

Digital gold is exchanged via bank transfer. Assume that you have a HDFC account and your friend needs 1000rs. What you will do is, open the app and do UPI or NEFT transfer of 1000rs to his bank account. You gave your friend 1000rs but you didn’t really have to physically go to the bank or collect and deposit money. The entire process was electronic. 

  • Similarly, when you buy physical gold, you get the physical delivery. Even if it is a small gold coin, you are responsible for it’s safety. But when you buy digital gold from some company, the gold is stored in that company’s warehouse and it’s safety is not your responsibility.                                   The company looks after the gold’s safety and security. And even if there is a theft or some other misfortune that befalls the warehouse, the company has insured it and you are still safe.
  • Next up, since you are not getting a physical delivery, you have the option to buy gold worth only Rs 100, Rs 500 or Rs 1000 according to your wish. And after that it is the company’s problem as to how they distribute it. They could store one gram of gold in their warehouse and tag it as under the joint ownership of five people who paid Rs 1000 each. This makes it similar to mutual funds and makes it more affordable and accessible. 
  • There is also more liquidity as you can sell this gold whenever you want with a few clicks and no one will doubt the purity. 

But there are still some problems that even digital gold can’t solve. Like:

  1. Taxation: Even here, you still have to pay the 3% for GST and
  2. Regular Income: You are still not getting any regular income or profit unless you sell it at a good price.

To solve these problems, the Sovereign Gold Bond was introduced. So, let’s see what that is.

Investing in Sovereign Gold Bond

Let’s directly take a headfirst plunge into its advantages.

  1. Just like in Digital gold, here also you don’t have to pay any extra charges while purchasing.
  2. But the best part is that you also don’t have to pay any GST on sovereign gold bonds and this means that you don’t have to pay any extra money for purchasing.
  3. The additional bonus of these bonds is that you get an annual interest of 2.5% of the market value.
  4. Which allows you to use this as an additional income source. 
  5. And it not only gives you the interest like a bank does on your savings, but it also allows you to get the profit from gold price appreciation.

Sovereign Gold Bonds also provide an 8 year ‘lock in to redeem benefit’ from RBI. Because of which, once you buy this, you can only redeem it from the RBI after 8 years. This entire process is online and is quite simple. 

Say if you invest Rs 5000 today, and eight years later, its value becomes Rs 10,000, you won’t have to pay any capital gain tax on this Rs 5000 that you earned. This is only possible though, if you keep it for 8 years which is not a compulsion. 

You can also exit after five years but because you’ve exited early, you have to pay the capital gain tax. But what if you want to exit before five years? This is also possible through the stock market. You can buy it today and sell it tomorrow the way you can do with stocks and mutual funds. 

And now, it’s time for the last tip - How can you buy gold at a cheaper rate than the market?

You can do this by buying the Sovereign Gold Bond, but not when it’s announced. You can buy it a few days later from the stock market and this will help you buy it for cheaper.

And that’s a wrap!

If you found this article helpful and want to read more about investing, then feel free to browse our blog. We have an entire series on this. In fact, you can also check out our YouTube channel for the same.