Gold Monetisation Scheme (GMS) vs. Gold ETFs: A Comparative Investment Analysis for India

In India, gold is more than just a metal; it is a symbol of wealth, security, and cultural heritage. Traditionally, households accumulated physical gold in the form of jewelry, coins, and bars. However, keeping physical gold comes with its own set of challenges, including storage costs, security risks, and purity concerns. Fortunately, modern financial instruments offer alternative ways to invest in or benefit from gold. Among these, the Gold Monetisation Scheme (GMS) and Gold Exchange Traded Funds (Gold ETFs) stand out. Understanding their nuances is key to making informed investment decisions in 2025.

As a leading CA in Mumbai, CA Sweta Makwana & Associates guides clients through diverse investment avenues. We help individuals optimize their portfolios and ensure tax efficiency. This includes making smart choices about gold investments.

Understanding the Gold Monetisation Scheme (GMS)

The Gold Monetisation Scheme (GMS) aims to mobilize idle household gold. It encourages individuals to deposit their physical gold with banks. In return, depositors earn interest on this gold.

How GMS Works:

Deposit Physical Gold: You deposit your physical gold (jewellery, coins, or bars) at a Purity Testing Centre (PTC) accredited by the Bureau of Indian Standards (BIS).
Purity Testing: The PTC assesses the gold’s purity and weight. It then issues a certificate.
Gold Deposit Account: Based on the certificate, the bank opens a Gold Deposit Account in your name. The gold value is converted into grams of 995 purity gold.
Interest Earned: The bank pays you interest on the gold deposited. Interest rates vary based on the deposit tenure.
Deposit Tenures: GMS offers different deposit periods:
- Short Term Bank Deposit (STBD): 1-3 years.
- Medium Term Government Deposit (MTGD): 5-7 years.
- Long Term Government Deposit (LTGD): 12-15 years.
Maturity Options: Upon maturity, you can choose to receive payment in either gold equivalent (995 purity gold) or in cash (based on the prevailing gold price). For MTGD and LTGD, a cash payment is mandatory.

Benefits of GMS:

Earn Interest: Your idle gold generates income, unlike physical gold stored in lockers.
Safety & Security: Eliminates the risk of theft and saves on locker charges. The bank holds your gold.
Purity Assurance: The gold undergoes precise purity testing, ensuring you get accurate value.
Tax Exemptions: Both the interest earned on GMS deposits and any capital gains arising from gold appreciation at maturity are exempt from income tax.
Utilize Idle Assets: It provides a productive way to utilize your dormant gold.

Drawbacks of GMS:

Loss of Physical Form: You surrender the physical gold. This can be an emotional challenge, especially for ancestral jewellery.
Fixed Tenure & Liquidity: GMS deposits have fixed lock-in periods. This makes them less liquid compared to Gold ETFs.
Valuation Concerns: If depositing jewellery, the melting process means you lose “making charges” and only get value for the pure gold content.
Early Withdrawal Penalties: Premature withdrawals attract penalties and may result in a lower interest rate.
Counterparty Risk: While generally low with banks, there’s always a theoretical risk associated with the banking institution.

Understanding Gold Exchange Traded Funds (Gold ETFs)

Gold ETFs offer a convenient and transparent way to invest in gold without holding it physically. They are essentially mutual funds that invest primarily in physical gold of high purity.

How Gold ETFs Work:

Demat & Trading Account: You need a Demat account and a trading account with a stockbroker to buy and sell Gold ETFs.
Units Represent Gold: Each unit of a Gold ETF typically represents a small quantity (e.g., 1 gram or 0.5 grams) of physical gold of 99.5% purity.
Price Tracking: The price of a Gold ETF unit directly tracks the domestic price of physical gold.
Traded on Exchanges: You can buy and sell Gold ETF units on stock exchanges (like NSE or BSE) throughout the trading day, similar to stocks.
Underlying Physical Gold: The Asset Management Company (AMC) managing the Gold ETF holds equivalent physical gold in secure vaults.

Benefits of Gold ETFs:

Convenience & Safety: No need to worry about storage, locker charges, or physical security.
High Liquidity: You can buy or sell units easily on the stock exchange during market hours. This offers quick access to funds.
Price Transparency: The price of Gold ETFs is transparent and reflects real-time market gold prices.
Guaranteed Purity: You invest in highly pure (99.5%) gold. You avoid purity concerns common with physical gold.
No Making Charges/Wastage: You don’t pay making charges (as with jewellery) or suffer wastage upon selling.
Capital Appreciation: Your investment value directly appreciates or depreciates with the market price of gold.

Drawbacks of Gold ETFs:

Requires Demat & Trading Account: This might be a barrier for some investors.
Brokerage & Expense Ratio: You incur brokerage charges for buying/selling units. Also, AMCs charge an annual expense ratio (a small percentage of your investment).
No Interest Income: Unlike GMS, Gold ETFs do not provide any regular interest income.
Market Volatility: The value of your investment fluctuates with gold prices.
Taxation on Capital Gains: Any long-term or short-term capital gains on Gold ETFs are taxable as per income tax laws.

Gold Monetisation Scheme vs. Gold ETFs: A Comparative Analysis (2025)

Let’s directly compare these two options across key parameters:

Feature	Gold Monetisation Scheme (GMS)	Gold ETF
Form of Holding	Physical gold converted to deposit account	Gold in electronic (Demat) form
Investment Goal	Earn interest on idle physical gold	Capital appreciation from gold price movements
Source of Gold	Existing physical gold (jewellery, coins, bars)	Fresh investment (cash)
Return Type	Fixed interest payments (in gold equivalent or cash)	Price appreciation (value of units rises)
Taxation	Interest income exempt. Capital gains exempt.	Capital gains taxable (LTCG/STCG as applicable)
Liquidity	Low (fixed lock-in periods; penalties for early exit)	High (tradeable on exchange during market hours)
Purity	Assured by Purity Testing Centres upon deposit	Guaranteed 99.5% purity (as underlying asset)
Costs	Purity testing/handling charges (may be absorbed by bank)	Demat account charges, brokerage, annual expense ratio
Ownership	Bank holds the gold (you hold the deposit certificate)	You own units in your Demat account (units linked to physical gold)
Physical Access	No direct access once deposited	No physical access (electronic units)
Ideal For	Those with idle physical gold, seeking regular income, tax benefits, and safety.	Those seeking gold price exposure, liquidity, and convenience.

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Who Should Choose Which? (Investor Suitability)

The choice between GMS and Gold ETFs largely depends on your specific financial goals and existing assets.

Choose GMS if:

You possess a significant amount of idle physical gold.
You want to earn a regular, tax-free income from your gold.
You prioritize safety from theft and do not wish to pay locker charges.
You are comfortable with a fixed lock-in period for your gold.
Your primary goal is not capital appreciation through market movements, but rather a fixed return on your gold.

Choose Gold ETFs if:

You want to invest fresh money in gold.
Your primary goal is capital appreciation tied to market gold prices.
You prioritize high liquidity and the convenience of buying/selling during market hours.
You do not want the hassle or risks associated with holding physical gold.
You are comfortable with the stock market mechanism (Demat/trading accounts, brokerage).
You understand and are prepared for capital gains taxation.

The Hybrid Approach: A Balanced Portfolio

Many investors find value in combining both. You might deposit your idle family gold into GMS to earn tax-free interest and ensure security. Simultaneously, you could invest fresh capital in Gold ETFs. This provides market-linked returns and liquidity. This hybrid approach offers a diversified exposure to gold, balancing income generation with capital appreciation potential.

The Indispensable Role of a CA/Financial Advisor

Navigating gold investment options requires a clear understanding of your financial situation and tax implications. CA Sweta Makwana & Associates, your trusted partner for financial planning and tax advisory, offers invaluable support:

Portfolio Diversification: We help you assess how gold fits into your overall investment portfolio.
Suitability Analysis: We evaluate your financial goals, risk tolerance, and existing assets. This helps determine which gold investment option (GMS, Gold ETF, or a combination) is best for you.
Tax Implications: We provide clarity on the tax treatment of both GMS interest/capital gains and Gold ETF capital gains. This ensures optimal tax efficiency.
Cost Analysis: We help you understand and compare all associated costs for each option.
Long-Term Strategy: We assist in formulating a long-term gold investment strategy aligned with your retirement or other financial goals.

Conclusion

Both the Gold Monetisation Scheme (GMS) and Gold ETFs offer modern, efficient ways to engage with gold as an asset class in India. They provide compelling alternatives to holding physical gold. While GMS transforms idle physical gold into an income-generating asset with excellent tax benefits, Gold ETFs offer direct market exposure, high liquidity, and convenience for fresh investments.

Your choice depends on your specific needs: whether you seek income from existing gold or capital appreciation from new investments. By understanding their unique characteristics and consulting with a financial expert, you can make an informed decision. This will ensure your gold investments contribute effectively to your overall financial well-being in 2025.

Ready to make smarter gold investment choices? For personalized financial planning and expert advisory, get in touch with CA Sweta Makwana & Associates today. We are committed to helping you build a robust and tax-efficient investment portfolio.

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