SEBI Issues Warning on Digital Gold Investments: Understanding the Risks and Alternatives

Digital gold provides a convenient method for purchasing and owning small gold quantities through online platforms.

The Securities and Exchange Board of India (SEBI) has issued a cautionary statement to investors regarding investments in digital or e-gold products. The markets regulator emphasized on Saturday that these investment vehicles fall outside its regulatory jurisdiction and pose "significant risks" to investors.

This warning comes amid increasing promotion of 'digital gold' by numerous online platforms that market it as a convenient alternative to physical gold ownership. SEBI has clarified that these offerings are neither categorized as securities nor regulated under commodity derivatives frameworks.

Digital gold enables individuals to purchase and own gold in small quantities via online platforms. When you buy through apps or websites, these services claim to store an equivalent amount of genuine 24K gold in secure vaults on your behalf. You receive a digital record indicating your gold ownership, with options to sell it back at any time or request physical delivery. It's marketed primarily for its accessibility and convenience.

The process of investing in digital gold involves paying money through an app or website, after which the provider records the corresponding gold quantity (in grams) credited to your account. The provider or its vault custodian claims to store physical gold in an insured vault, sometimes with a refiner issuing a branded bar or receipt. Investors can sell back to the platform for immediate liquidity or, with some offerings, request delivery of physical gold or coins (subject to fees and minimum requirements).

When compared to regulated alternatives, digital gold differs from Gold ETFs (mutual fund units representing physical gold traded on stock exchanges), Sovereign Gold Bonds (government-issued bonds that pay interest and offer tax efficiency if held until maturity), and Electronic Gold Receipts (tradeable receipts backed by physical gold stored in SEBI-approved vaults).

Digital gold offers several benefits, including ease of buying or selling at any time, low entry investments starting from just Rs 10-Rs 100, elimination of physical storage concerns, and the option to redeem in coins or bars.

However, there are significant drawbacks to investing in digital gold. These include lack of regulation by SEBI or RBI, absence of guaranteed investor protection, complete dependence on the company's honesty and financial stability, potential hidden fees (for delivery, storage, or making charges), and limited legal recourse should problems arise.

Regarding taxation in India, purchasing gold, whether physical or digital, typically attracts GST, though the exact rate for digital gold may vary depending on how the provider structures the product. When selling digital gold, any profit is treated as a capital gain, with the tax rate determined by how long you have held the investment.