Let me put it this way:
1. The RBI has fixed the gold price to be 2,668.4/- per gm. while MCX gold price currently is 2,567/- per gram. That is a 3.7% premium (or loss to the investors) Essentially you lose 1.5 years of interest on a 8 year instrument (without taking tax into account) This is taking into account the price rise of gold due to Paris bombing. Otherwise the premium that one had to pay was even more.
2. Tax treatment is misleading
a. They say that TDS will not be deducted but that does not mean that this instrument is tax free.
b. Interest & any capital gains that you make at the end of 8 years will be taxed.
c. I am highlighting this because the SBI’s gold deposit scheme takes care of all your taxes (both capital & interest income)
3. 5 year lock in and 8 years maturity
a. Gold & bank accounts are considered as liquid money that can help one in emergencies. Unfortunately entering into a 5 year lock-in will take the liquidity away. However some of this drawback will be mitigated by the facility of loans (75%) and its listing in the index.
4. Convenience of digital format is an odd reason.
a. One of the reasons why people invest in gold is because it has a high value to weight ratio. (1CR or 10million INR has a weight of 12kgs while 1cr of gold weighs less than 4kgs). If you take the density of gold vs paper into account, the amount of locker space it occupies for storage is miniscule. So unless u have like a ton of gold, converting into demat form will not help you much in saving weight. But then remember the limit of investment is 500gm.
5. If you don’t want the tax authorities to know your net worth (for legitimate or privacy) then this is a wrong instrument.
6. If you are a minority and believe that RSS & Modi is going to incite a series of communal violence to ensure mass exodus then you are better off with something that you can touch/feel/carry. Remember all you get is a certificate (digital/paper) which might not be of much value if you become an asylum seeker.
Gold has been a cherished investment instrument for many in India. Reasons:
1. Black Money: Unlike cash, it occupies less space, is not inflammable, not prone to termites and appreciates in value.
2. Indian rupee is a joke and will continue to depreciate further. So you are better off with something tangible. In fact all the appreciation that one has seen in Gold is primarily because of weakness of Indian rupee and not because of purchasing power of gold going up.
3. Gold prices is dictated by the war/recession/terrorism and uncertainty in general. Hence as IS is gaining momentum & China going into recession gold will become dearer.
4. It is still probably the only form of wealth that is liquid and yet hard to trace by authorities.
All being said 2.75% on something that otherwise not earn anything is not a bad deal. Even after adjusting for tax & loss at the time of purchase, you should be better off with bonds rather than physical paper.