Gold ETF in India

A Gold ETF (Gold Exchange-Traded Fund) in India is an open-ended fund that is listed and traded on a stock exchange, where each unit represents ownership of a defined quantity of physical gold (typically 0.01 gram or 1 gram of gold of 99.5% or 99.9% purity). The fund’s assets are invested in physical gold held in a custodian-approved vault, and the NAV of each unit tracks the domestic gold price. SEBI regulates gold ETFs under the SEBI (Mutual Funds) Regulations, 1996, and has issued specific guidelines on gold ETF structure, custodianship, and audit requirements.

Gold ETFs are the most transparent and cost-efficient way to invest in gold in India, eliminating the making charges, impurity risks, storage costs, and security risks associated with physical gold jewellery or coins.

Regulatory framework

SEBI categorisation

Under SEBI’s October 2017 scheme categorisation circular, gold ETFs are categorised under “Other Schemes – ETFs” and specifically as Gold ETF:

• Underlying: Physical gold of 99.5% purity or above (as per LBMA standards).
• Unit size: Typically 1 unit = 1 gram of gold, though some AMCs offer smaller denominations.
• Exchange listing: Units are listed on NSE and/or BSE and traded continuously during market hours.

Custodian requirements

SEBI mandates that the physical gold held by a Gold ETF be:

• Stored with a designated custodian (typically a bank custodian or specialised vault operator with SEBI approval).
• Audited by an independent auditor at least twice a year.
• Insured against theft, damage, and other risks.
• Held separately from the custodian’s own assets.

AMC trustees are responsible for oversight of the custodian arrangements. Major gold ETFs in India use custodians such as Deutsche Bank, Standard Chartered, or specialist vault operators.

Creation and redemption (in-kind mechanism)

Gold ETFs use a creation/redemption mechanism:

• Large investors (authorised participants / market makers): Can create ETF units by depositing physical gold with the custodian in exchange for new units, or redeem large blocks of units for physical gold. The minimum creation/redemption lot is typically 1 kg of gold (1,000 units for a 1 gram/unit ETF).
• Retail investors: Buy and sell units on the secondary market (NSE or BSE) through a demat and trading account, without physical gold delivery. The market price tracks the NAV closely due to arbitrage by authorised participants.

Pricing and tracking

Gold ETF prices in India are expressed in Indian rupees and reflect:

1. The international spot gold price (in USD per troy ounce).
2. The USD/INR exchange rate.
3. Import duty on gold (12.5% as of 2025-26, subject to change).
4. Storage and insurance costs (included in the TER).
5. GST on gold imports.

Because gold is imported, Indian gold prices carry an import duty premium over international prices. Gold ETF prices reflect this import-adjusted domestic gold price (the “AM/PM Fix” or LBMA spot price converted to INR plus duty).

Expense ratios

Gold ETFs have very low TERs:

• Direct plan / ETF: 0.40% to 0.80% per annum; some larger funds are as low as 0.29% to 0.35%.
• No regular plan in the traditional sense; ETFs are bought on the exchange.

The only cost to the retail investor, beyond the TER, is the brokerage and STT on the buy/sell transaction.

Taxation

Gold ETFs are not equity-oriented funds; they are treated as non-equity / commodity funds for tax purposes.

For units purchased on or after 1 April 2023 (Finance Act 2023 amendment):

All gains from gold ETFs are taxed as STCG at the investor’s slab rate, regardless of holding period. The earlier 3-year LTCG-with-indexation benefit for non-equity funds was abolished for units purchased from April 2023.

For units purchased before 1 April 2023:

• Less than 3 years: STCG at slab rate.
• 3 years or more: LTCG at 20% with indexation.

Securities Transaction Tax applies on gold ETF transactions on the exchange (as with equity ETFs). See capital gains tax in India and ITR-2 for reporting.

GST: No GST on the purchase or sale of Gold ETF units (unlike physical gold jewellery, which attracts 3% GST).

Comparison with alternative gold investment instruments

Gold ETF versus physical gold (jewellery / coins / bars)

Gold ETF versus Sovereign Gold Bond (SGB)

Sovereign Gold Bonds are government securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India, denominated in grams of gold:

For long-term investors who hold to maturity, SGBs offer 2.5% interest plus tax-free capital gains on the gold price appreciation, making them superior to gold ETFs on post-tax returns. However, SGBs have limited issuance windows, illiquid secondary markets, and a fixed 8-year tenor with 5-year early exit, whereas gold ETFs offer perpetual, real-time liquidity.

Gold ETF versus FoF-gold

A gold fund of funds invests in gold ETF units through a fund-of-funds structure, allowing SIP and non-demat investors to access gold ETF returns without a demat account. Gold FoF units are purchased and redeemed directly from the AMC. The expense ratio is slightly higher (ETF TER plus FoF TER layer) than buying a gold ETF directly.

Role of gold in a portfolio

Gold serves specific portfolio roles:

• Safe-haven: Gold historically rises or holds value during periods of geopolitical uncertainty, equity market stress, and currency crises.
• Inflation hedge: Gold provides partial protection against long-run inflation, though its short-run correlation with inflation is inconsistent.
• Currency hedge: Gold prices in INR include a USD/INR component; a weakening rupee boosts gold ETF NAVs in INR terms.
• Diversification: Gold has low to negative correlation with equities and bonds in stress scenarios, reducing portfolio drawdowns.

Financial advisers commonly recommend 5% to 15% gold allocation in a diversified portfolio.

Exemplar schemes

Well-known gold ETFs in India:

• HDFC Gold ETF (HDFC Mutual Fund)
• ICICI Prudential Gold ETF (ICICI Prudential Mutual Fund)
• SBI Gold ETF (SBI Mutual Fund)
• Nippon India Gold BeES (Nippon India Mutual Fund) – India’s first gold ETF, launched 2007
• Kotak Gold ETF (Kotak Mahindra Mutual Fund)
• Axis Gold ETF (Axis Mutual Fund)
• UTI Gold ETF (UTI Mutual Fund)
• Aditya Birla Sun Life Gold ETF (Aditya Birla Sun Life Mutual Fund)

These are cited for reference only.

Suitability

Gold ETFs are suitable for:

• Investors seeking a transparent, cost-efficient, and liquid alternative to physical gold.
• Investors who want gold exposure in their portfolio without the risks and costs of physical gold.
• Investors with demat accounts who can trade gold ETF units on NSE or BSE.
• Portfolio investors allocating 5% to 15% to gold as a diversifying asset.

Gold ETFs are less suitable for:

• Long-term investors with 8+ year horizons who are eligible for Sovereign Gold Bonds (which offer 2.5% annual interest and tax-free capital gains at maturity).
• Investors who do not have or do not wish to maintain a demat account (who may use a gold fund of funds instead).

Regulatory oversight

Gold ETFs are regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996. The mutual fund industry in India framework governs fund operations.

References

1. SEBI Circular SEBI/HO/IMD/DF3/CIR/P/2017/114, “Categorisation and Rationalisation of Mutual Fund Schemes”, 6 October 2017.
2. SEBI circular on Gold ETF structure and custodianship guidelines.
3. Finance Act 2023, Section 50AA.
4. RBI, Sovereign Gold Bond Scheme, operational guidelines.
5. SEBI (Mutual Funds) Regulations, 1996, as amended.