Gold investment on Dhanteras 2026: Physical gold or gold ETFs? Which offers better tax benefits to investors?

With Dhanteras and Diwali approaching, investors looking to buy gold have another decision to make besides timing their purchases: whether to invest in physical gold or gold exchange-traded funds (ETFs).

While both options offer exposure to gold prices, their taxation differs, particularly when it comes to the holding period required to qualify for long-term capital gains (LTCG) tax. Gold ETF investors can qualify for LTCG taxation after holding their units for more than 12 months, whereas physical gold must be held for more than 24 months.

This difference can influence post-tax returns, especially for investors who plan to sell their investments within two years. However, taxation is not the only consideration. Buyers must also account for GST, making charges, storage expenses and fund management costs before choosing between the two options.

Physical gold includes jewellery, coins, bars and bullion. Under the capital gains tax rules applicable to transfers made on or after July 23, 2024, physical gold qualifies as a long-term capital asset only when held for more than 24 months.

If an investor sells physical gold within 24 months of purchase, the resulting gains are classified as short-term capital gains (STCG) and taxed at the applicable income-tax slab rate.

However, if the gold is sold after 24 months, the gains qualify as LTCG and are taxed at 12.5%, without indexation benefit. Applicable surcharge and cess are additional.

For instance, if an investor purchases physical gold worth ₹10 lakh and sells it for ₹14 lakh after holding it for more than two years, the ₹4 lakh profit will attract LTCG tax of ₹50,000, excluding surcharge and cess.

Investors must also consider the cost of purchasing physical gold. Jewellery purchases generally attract 3% GST on the transaction value, including making charges. This increases the initial investment cost and can affect overall returns.

Buyers should preserve purchase invoices to establish the acquisition cost and holding period when calculating capital gains at the time of sale.

Gold ETFs are investment instruments that track domestic gold prices. Investors purchase units through a demat and trading account instead of buying and storing physical gold.

Their taxation offers an advantage over physical gold because listed gold ETF units qualify for LTCG treatment after a holding period of more than 12 months.

If an investor sells gold ETF units within 12 months, the gains are treated as STCG and taxed at the applicable income-tax slab rate. If the units are held for more than 12 months, the gains qualify as LTCG and are taxed at 12.5%, without indexation benefit, along with applicable surcharge and cess.

For example, an investor purchasing gold ETFs during Diwali 2026 and selling them after 18 months would qualify for LTCG taxation. However, someone purchasing physical gold on the same occasion and selling it after 18 months would still incur STCG tax at their applicable slab rate.

Investors should also remember that gold ETFs do not qualify for the ₹1.25 lakh annual LTCG exemption available under Section 112A to specified equity shares and equity-oriented mutual funds.

Taxation is not the only factor separating physical gold from gold ETFs.

Physical gold involves purchase-related expenses, including GST and, in the case of jewellery, making charges. Investors also need to consider storage and security costs. These expenses can reduce effective returns when gold is eventually sold.

Gold ETFs avoid the need for physical storage and generally offer greater convenience when buying or selling gold exposure. However, investors must account for the fund's expense ratio, brokerage and applicable transaction charges. ETF prices can also differ slightly from the underlying value of gold.

Another consideration is the purpose of buying gold. Jewellery and coins may serve personal, gifting or traditional requirements, whereas gold ETFs are primarily investment instruments.

Ultimately, investors looking to accumulate gold for personal use may prefer physical gold, while those seeking portfolio exposure to gold prices may find ETFs more convenient. For investors planning to sell within two years, the shorter LTCG holding period makes gold ETFs particularly attractive from a taxation perspective.

Kirti jha

Kirti Jha is a Senior Content Producer at Mint, where she writes on mutual funds, taxation, personal finance and macroeconomic developments. Her reporting focuses on helping readers understand complex financial developments through data-driven, research-backed stories that explain how policy changes, market trends and regulatory decisions affect investors and households. <br><br> Before joining Mint, Kirti worked at ET Money, where she specialised in mutual fund research and investment analysis. She tracked portfolio disclosures, fund manager strategies, sectoral allocation shifts and investment trends, distilling large datasets into investor-focused insights. Her work combined quantitative analysis with consumer-centric storytelling, enabling readers to better understand fund positioning, portfolio changes and long-term investment opportunities.<br><br> Kirti holds a Bachelor's degree in Economics from Indraprastha College for Women, University of Delhi, and a Master's in Finance from the Jindal School of Banking & Finance at O.P. Jindal Global University. Her academic training emphasised analytical thinking, quantitative research and financial decision-making, providing a strong foundation in understanding capital markets, financial systems and economic policy. With a combined experience in investment research and financial journalism, she is committed to producing accurate, accessible and insightful journalism that empowers readers to make well-informed financial decisions.

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