What is a Gold ETF?

A gold exchange traded fund holds physical gold and issues units that trade on the exchange. Buying a unit gives you exposure to the gold price without holding metal, and it does so at a cost and a tax treatment that differ meaningfully from every other route to gold in India.

What sits behind a unit

Physical gold, held with a custodian, of the purity SEBI prescribes for these schemes. The fund's net asset value tracks the domestic price of that gold, which reflects the international price, the rupee exchange rate and import duty.

Different schemes define a unit differently, some as one gram of gold and some as a fraction, so the unit price alone tells you nothing about whether a fund is cheap or expensive. Compare expense ratios and tracking, not unit prices.

How it compares with physical gold

• No making charges, which on jewellery are substantial and unrecoverable
• No storage cost and no locker
• No purity question, since the holding is standardised and audited
• No goods and services tax on units, whereas physical gold attracts it at purchase
• Divisible and sellable in part, unlike a coin or a piece of jewellery
• No emotional or ornamental use, which for many Indian buyers is the entire point of gold

That last line is not a joke. If the purpose is a wedding, an exchange traded fund does not serve it. If the purpose is exposure to the gold price, physical metal is an expensive way to obtain it.

The comparison that costs people money

A gold exchange traded fund and a gold fund are not the same product. The fund is usually a fund of funds that buys units of the exchange traded fund, which exists so that investors without a demat account can participate and can run a systematic investment plan.

Two consequences follow. The fund of funds carries its own expense ratio on top of the underlying fund's, so total cost is higher. And its units are not listed, which changes the tax position materially.

Tax treatment for AY 2026-27

Gold exchange traded fund units are listed, so they become long term after twelve months. Long term gains are taxed at twelve and a half per cent with no indexation. Gains on units held twelve months or less are short term and taxed at your slab rate.

A gold fund of funds holds unlisted units, so the threshold is twenty four months rather than twelve. Same underlying metal, an extra year to wait for the long term rate.

Two further points. The annual exemption available on long term equity gains does not apply here, because these are not equity oriented schemes. And from FY 2025-26 the specified mutual fund rule in section 50AA applies only to funds investing more than sixty five per cent in debt and money market instruments, so gold funds are no longer caught by it as they were under the earlier definition.

What can go wrong

• Premium and discount. In a fast moving gold market the traded price can drift from the indicative net asset value, and a premium paid on entry is a permanent cost
• Thin trading in the smaller schemes, producing wide spreads
• Tracking difference, since the fund carries costs the gold price does not
• Currency. A rupee investor's gold return combines the international price and the exchange rate, and the two do not always move together
• Duty changes. A change in import duty moves the domestic gold price independently of the international one

What to check

• The expense ratio, and the total cost if you are buying through a fund of funds
• Traded volume over recent days and the spread when you intend to trade
• The premium or discount to indicative net asset value before ordering
• Tracking difference against domestic gold prices over multiple periods
• Whether the twelve month or twenty four month threshold applies to the route you are using
• Whether you actually want metal, in which case none of this applies