Why Selling Physical Gold in India Is Harder Than You Think

Selling gold in India isn’t easy. Jewellers push exchange, cash is restricted, tax applies, and exiting physical gold is financially painful. A practical guide.

In India, buying gold is easy. You walk into a jewellery shop, choose a design, pay the amount, and walk out proudly. Selling gold is the opposite experience. It is slow, uncomfortable, emotionally difficult, and financially disappointing.

Most importantly, selling gold does not mean getting money back. It means struggling to get money back.

People expect to walk into a jewellery shop and walk out with cash. Instead, they are met with a wall of resistance: exchange schemes, mandatory deductions, melting loss, documentation requirements, compulsory bank transfers, and taxes.

This article explains, practically and honestly, why converting your physical gold into usable, compliant cash is far harder than most imagine.

Long back I wrote an article on how much you lose when you hold Gold in physical format. Refer to the same at “Is Gold Jewellery a Good Investment? Beware 30% Hidden Loss!” Also, refer all my articles on Gold at “Gold Archives“.

Why Selling Physical Gold in India Is Harder Than You Think

The Real Value: Your Gold Is Not What You Think It Is

The first financial disappointment comes from the valuation process. Jewellery is not pure gold.

1. Impurities and Purity Test: Most Indian jewellery is 22-carat (91.6% purity). After removing non-gold elements like stones, lac, and solder, the actual fine gold content is significantly lower.
2. The Deduction Shock: A 100-gram piece of jewellery typically contains only 80 to 85 grams of pure gold.
3. Wastage/Refining Charges: Even after calculating the pure weight, the buyer (jeweller or refiner) will apply a further 1% to 5% deduction to cover the cost of melting and refining the metal back into reusable bullion.

If 100 grams of jewellery contains 84 grams of pure gold, and the 24K price is Rs.6,500 per gram, the theoretical value is Rs.5.46 lakh. This is the ceiling you cannot reach.

The Five Ways to Encash Physical Gold in India

There are five commonly used methods to encash physical gold.

Each of them accepts gold with or without a bill. The difference lies not in acceptance, but in transparency, pricing, compliance, and convenience.

Let us look at each one carefully.

Option 1 – Why Big Jewellers Don’t Want to Pay Cash

This is the biggest myth of physical gold liquidity. Large jewellery brands are not in the business of buying gold from you; they are in the business of selling gold to you.

When you walk in to sell gold, their primary objective is exit prevention.

• The Exchange Push: Their first response is always to push for an exchange for new jewellery. Exchange keeps your money trapped within the gold ecosystem, and they often offer a better valuation for exchange than for a cash sale.
• The Cash Deterrent: When they do agree to buy for cash, the deductions (wastage, refining, and margin) are usually maximized to make the option financially unattractive.
• The Compliance Barrier: As soon as the transaction is significant (over Rs.2 lakh), they are legally required to demand your PAN and insist on a digital bank transfer. Cash is almost never offered for meaningful amounts.

Practically, large jewellery chains are designed to convert your old gold into new gold, not convert your gold into cash.

The Two Places That Truly Let You Exit Gold

If you genuinely want to get out of gold and receive money, you must go to places whose business model is centered on metal processing, not retail sales.

Option 2: BIS-Certified Refiners/Bullion Dealers

Refiners like MMTC-PAMP specialise in melting jewellery and paying the value of the pure metal content.

• Financial Advantage: They pay the highest price for the pure metal—often $95\%$ to $98\%$ of the theoretical fine gold value—because they utilize the metal directly in their supply chain.
• The Cost: The cost is emotional (your family jewellery is destroyed and melted immediately) and logistical (these centres are generally limited to major cities).
• The Cash Flow: This is a true exit. You receive compliant, traceable money directly into your bank account.

Option 3: Local Jewellers

Local jewellers may offer a quick, convenient transaction, often relying on high-volume cash flow.

• Financial Disadvantage: They pay the worst price, sometimes only $85\%$ to $90\%$ of the theoretical value, by maximizing deductions for wastage and their own margin.
• The Cost: Testing is often opaque and valuation is less trustworthy.
• The Cash Flow Trap: While they may offer quick cash for small amounts, transactions over $Rs.2$ lakh are illegal in cash. Pushing for cash transactions above this limit creates an immediate tax compliance risk for both you and the dealer.

Option 4 — The GMS: Not Exit, But Tax-Free Postponement

The Gold Monetisation Scheme (GMS) is a unique, government-backed deposit scheme, not a route for immediate liquidation.

• Scheme Status (Dec 2025): As per RBI notifications, the Medium-Term and Long-Term Deposits (MTGD/LTGD) have been discontinued. Only the Short-Term Bank Deposit (STBD) of 1-3 years is currently active.
• Liquidity: The gold is locked away for the deposit tenure. It is not a solution for urgent liquidity needs.

Crucial GMS Repayment Options (STBD)

The investor must decide the repayment format upfront, and the decision is irrevocable:

Repayment Detail	Principal Repayment	Interest Payment
At Maturity	Option to choose: Gold (in grams) OR Cash (INR equivalent of the gold value on maturity date).	Always paid in Indian Rupees (INR) based on the gold value at the time of deposit.
Premature Withdrawal	Allowed after 1 year lock-in with penalty. Repayment in Gold or Cash is at the discretion of the Bank.	Subject to a penalty on the low interest rate.

• MAJOR TAX BENEFIT: This is the GMS’s true value. The interest earned and the capital gains from the appreciation of the gold principal are fully exempt from Income Tax. This makes it the most tax-efficient method for long-term holders.

The Law Makes the Exit Expensive and Traceable

The entire legal framework is designed to make significant cash exits difficult and all profits taxable.

• The Cash Barrier: Indian law (Section 269ST) prohibits receiving more than Rs.2 lakh in cash in a single transaction. This forces all meaningful exits to be digital, traceable, and reportable.
• The Tax Hit: Once the digital exit is complete, the profit is taxed at a compulsory flat 12.5% LTCG rate (for gold held over 24 months). The government takes its cut before the money is clean.
• The Bill Problem: If you cannot produce the original bill for inherited or gifted gold, the Income Tax Department may assign a low (or zero) cost of acquisition, dramatically increasing your taxable profit and risk of scrutiny.

Final Reality

Gold is:

• Easy to buy.
• Emotionally comforting to hold.
• Culturally respected.

But it is:

• Financially hard to sell, with minimum $5\%$ loss guaranteed from deductions.
• Harder to get cash from, due to the legal Rs.2 lakh cash limit.
• Expensive to exit, due to the 12.5% LTCG tax without indexation.
• Exit-resistant, due to jeweller incentives and emotional cost.

Physical gold is not liquid. It is a trapped, exit-resistant asset. That is the uncomfortable truth most people only learn when they try to sell.

Conclusion

Physical gold is not a financial asset; it is a cultural asset with financial consequences. The difficulty of converting it into compliant cash is not accidental – it is built into the system through jeweller incentives, legal limits, tax structure, and the emotional cost of destruction.

Understanding this friction is the first step toward smart financial planning.

Conversion Method	Pricing (% of Theoretical Value)	Liquidity & Form	Tax Consequences
Large Organised Jeweller	90% to 95%	Medium (Digital Transfer)	LTCG 12.5% flat (after 24 months)
BIS-Certified Refiner	95% to 98% (Highest)	High (Digital Transfer)	LTCG 12.5% flat (after 24 months)
Local/Unorganised Jeweller	85% to 90% (Lowest)	High (Cash risk below Rs.2L)	LTCG 12.5% flat; High risk of non-compliance.
GMS (STBD)	N/A (Deposit Scheme)	Very Low (Locked 1-3 years)	100% Tax Exempt (Best for holding).