Gold or Mutual Funds, After Charges and Tax
- What physical gold costs you before it earns anything
- What a mutual fund costs you
- The tax layer, honestly
- What gold is actually for
- Where this fits
Most gold-versus-mutual-fund comparisons put two return figures side by side and stop. That comparison is close to useless, because one of the two arrives with costs the other does not have, and those costs are deducted before you ever see a return.
Work the charges first. They decide more than the returns do over short holding periods.
What physical gold costs you before it earns anything
Making charges. Jewellery carries fabrication cost, commonly quoted either as a percentage of gold value or per gram. It is not recoverable. When you sell, you are paid for metal, not craftsmanship.
GST on purchase. Charged on the purchase and not recovered on sale by an individual.
Purity loss on resale. Jewellery is typically 22 carat; the resale price is usually settled against 24 carat metal content, so roughly 91.6% of the weight is paid for. Sell to a different jeweller and a further deduction for melting and assaying is common.
Storage. A bank locker has an annual rent. Keeping gold at home has no fee and a different kind of cost.
The round trip, quantified
₹5,00,000 of 22 carat jewellery, held five years, gold price rising 8% a year.
| Line | ₹ |
|---|---|
| Gold value at purchase | 4,16,700 |
| Making charges at 12% | 50,000 |
| GST at 3% on gold and making | 14,000 |
| Rounding and hallmarking | 19,300 |
| Amount paid | 5,00,000 |
| Metal value after 5 years at 8% a year | 6,12,300 |
| Less: purity adjustment on resale, ~8.4% | (51,400) |
| Less: locker rent, 5 years at ₹2,500 | (12,500) |
| Gross proceeds | 5,48,400 |
Assumptions: 12% making charges and 3% GST, a 22 carat piece sold against 24 carat content, no additional melting deduction, an 8% annual rise in gold price, and a ₹2,500 annual locker rent. Every one of these varies by jeweller, city and piece.
Gold rose 47% over five years. The holder is up 9.7% in total, or about 1.9% a year before tax. The gap is not the market. It is the making charge, the GST and the purity adjustment, none of which the price chart shows.
A sovereign gold bond or a gold exchange traded fund removes making charges, purity loss and locker rent entirely, which is why the same 8% price rise produces a very different outcome in those wrappers. The three routes compared sets out how they differ.
What a mutual fund costs you
The charge structure is smaller and much easier to see.
Expense ratio, deducted daily from net asset value, so the return you see is already net of it. A direct plan costs less than a regular plan because no distributor commission is embedded.
Exit load, if you redeem inside the specified period. Zero after it.
Stamp duty on purchase, small enough to be immaterial on most holdings.
There is no equivalent of a making charge, and nothing is deducted for the condition of what you are selling.
The same ₹5,00,000 in an equity fund
| Line | ₹ |
|---|---|
| Invested | 5,00,000 |
| Value after 5 years at 11% gross, less 1.0% expense ratio | 8,05,300 |
| Exit load after 5 years | Nil |
| Gross proceeds | 8,05,300 |
Assumes 11% gross annual return and a 1.0% expense ratio, so 10% net. Equity returns are not guaranteed and a five-year window can easily deliver less than this or more.
The tax layer, honestly
Both are capital assets and both are taxed on gain, but under different holding periods and different rates, and equity mutual funds are treated differently from gold.
For tax year 2026-27 under the Income-tax Act, 2025, physical gold held more than 24 months is long-term and the gain is taxed at 12.5% under section 197, without indexation. Equity fund units held more than 12 months are long-term; gains above ₹1,25,000 in the year are taxed at 12.5% under section 198. Short-term gold gains are taxed at your slab rate and short-term equity fund gains at 20% under section 196. Rates are before surcharge and 4% cess.
Applied to the example, before cess and assuming no other long-term gains in the year:
- Gold: gain in hand = ₹5,48,400 − ₹5,00,000 = ₹48,400. Locker rent is not deductible in computing capital gains, so the taxable gain is ₹60,900 (₹5,60,900 sale proceeds less ₹5,00,000 cost). Tax at 12.5% = about ₹7,610, leaving about ₹5,40,790.
- Equity fund: gain = ₹8,05,300 − ₹5,00,000 = ₹3,05,300. Tax at 12.5% on ₹1,80,300 above the ₹1,25,000 threshold = about ₹22,540, leaving about ₹7,82,760.
Note what this does to the comparison. The fund has a much larger gain, so it bears more tax in absolute terms, and the after-tax gap narrows. It does not close. After tax the gold holder keeps about ₹5,40,790 and the fund holder about ₹7,82,760.
What gold is actually for
This is not an argument that nobody should own gold. It is an argument against owning it in the most expensive available form and calling it an investment.
Gold has a real portfolio role. It is uncorrelated with equity over long periods, it holds value in currency stress, and for many Indian households it serves a purpose that no fund can: it is wearable, giftable and culturally load-bearing at weddings. None of that shows up in a return comparison and none of it is irrational.
The distinction worth holding onto is between gold you wear and gold you hold as an asset. Buy the first for what it is and accept the making charge as the price of the object. For the second, the wrapper that avoids making charges and purity loss is strictly better, and it costs nothing to use it.
Where this fits
- The side-by-side tool, to project both on your own amount, period and return: gold vs mutual fund
- The three gold routes: SGB, gold ETF or physical gold
- Project the fund side: mutual fund returns calculator
- What inflation does to both: real return after inflation
- Measuring returns properly: XIRR or CAGR