Tokenised Gold: 30% VDA Tax and Custodian Risk for Indian Traders

Tokenised gold tokens – PAXG (Pax Gold) and XAUT (Tether Gold) – offer 24x7 gold exposure on blockchain. Indian investors face a 30% VDA tax rate, custodian audit risk, and platform dependence that differ materially from gold ETFs or physical bars. Understanding the mechanism behind these risks is the difference between an informed allocation and a costly mismatch.

The Tokenised Gold Mechanism: Trust Chain vs. ETF

The Simple Read

A tokenised gold token is an ERC‑20 token backed by a specific quantity of physical gold stored in a vault. Built on blockchain, it allows fractional ownership, round‑the‑clock trading, and use in DeFi protocols as collateral. No vault visit, no demat account, no exchange‑hours constraint.

The Better Market Read

The trust chain relies on a private custodian. For PAXG, Paxos holds the gold and publishes monthly audits by Withum. For XAUT, Tether acts as its own custodian with less frequent audits. Neither is regulated by SEBI or RBI. The token is only as good as the custodian's ability to deliver physical metal on demand.

Key insight: The token is a claim on a specific bar held by a third party. The audit frequency and independence vary by issuer. An ETF holder relies on a regulated fund house and a bank custodian. A tokenised gold holder relies on self‑disclosure.

Liquidity is another differentiator. The intraday spread on PAXG can widen by 50 basis points during low‑volume hours on Indian crypto exchanges. A gold ETF trades with less than 10 bps spread during market hours. The flexibility of fractional ownership below one gram comes with execution risk that an ETF shareholder does not face.

The Tax Trap: 30% VDA Changes the Net Return

How Tax Classification Works

India’s Virtual Digital Assets (VDA) tax regime applies to any digital asset not covered by SEBI’s regulatory perimeter. Tokenised gold tokens are classified as VDA, not as gold. Gains are taxed at 30% with no indexation benefit and no deduction for costs of acquisition except the purchase price. Losses cannot be offset against other income.

Compare with a gold ETF. Gains held for more than 36 months qualify for long‑term capital gains at 20% with indexation or 10% without, whichever is lower. The difference on a five‑year holding period can be 8–10 percentage points of effective tax rate, depending on the investor’s bracket.

The Net Return Difference

For an investor expecting a 10% annual gold return, the post‑tax return at 30% VDA is 7%. Under the ETF tax regime, roughly 8.5%. Over five years, that gap compounds into a meaningful reduction in final wealth.

Prateek Gupta, Head of Business at Mudrex, stated directly: “One should also be ready to absorb the 30% VDA tax rate on gains.” He added that tokenised gold “is more suitable for those who want fractional access to gold, such as positions below one gram, without the cost burden of physical storage or the exchange‑hours restriction of ETFs.”

Custodian Risk and Audit Schedule: The Unseen Exposure

What Confirms Safety of the Thesis

• Monthly or quarterly audits by a top‑10 global accounting firm
• Custodian insurance covering theft and loss
• Regulatory registration such as the NYDFS trust charter for Paxos (though not applicable in India)
• Platform that supports direct withdrawal of tokens to a self‑custodied wallet

What Weakens the Thesis

• A delay in audit publication beyond the stated schedule
• Custodian change without clear rationale
• Platform withdrawal or suspension of withdrawals (as seen with crypto lending platforms)
• Absence of insurance or proof of reserves

Gupta gave a hard rule for retail investors: “If you depend on regulatory safety nets, need guaranteed interest income, or are within three to five years of retirement, tokenised gold is not the right instrument for your core gold allocation.”