A Detailed Comparison Between Sovereign Gold Bonds and Physical Gold

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A Detailed Comparison Between Sovereign Gold Bonds and Physical Gold banner

Since time immemorial, gold has consistently held the position of a symbol of auspiciousness in India. Such reverence for the precious metal is one of the many reasons why Indians prefer investing in gold. It also helps that financially, the yellow metal makes for a potentially inflation-beating investment option

However, in addition to physical gold, you can also consider investing in Sovereign Gold Bonds (SGBs). In a bid to reduce its dependency on gold imports, the Government of India launched SGBs in November 2015. If you view gold as a viable investment option that could help you achieve your long-term goals, you could purchase SGBs instead of physical gold. SGB investments also have far-reaching economic benefits as they help the country cut down on gold import bills significantly.

But how do Sovereign Gold Bonds stack up compared to physical gold? In this article, we examine the two investment avenues and offer a detailed comparison of SGB vs physical gold.

An Overview of Physical Gold and Sovereign Gold Bonds

Physical gold comes in various tangible forms, ranging from ornaments and jewellery to bars and coins. You can purchase physical gold from banks, bullion dealers, registered jewellery stores and even from e-commerce websites.

Sovereign Gold Bonds, on the other hand, are financial instruments that are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The bonds are denominated in grams of gold and have a maturity period of 8 years — with the option to redeem them prematurely. Since they are denominated in gold, SGBs also offer the benefit of capital appreciation if the price of gold increases with time. In addition to this, SGBs also offer a nominal interest at the rate of 2.5% per annum. The interest will be credited to your bank account semi-annually.

The Key Differences Between Sovereign Gold Bonds and Physical Gold

Understanding the key areas of difference between Sovereign Gold Bonds and physical gold is crucial to making informed investment decisions. Here’s a detailed overview of how these two investment options stack up against each other.

  • Availability

Physical gold is readily available and can be purchased at any point in time from banks, registered jewellery stores or even bullion dealers. Sovereign Gold Bonds, however, are not as readily available as physical gold.

The Reserve Bank of India issues them in tranches, with each tranche having a specific window for application. If you miss applying for bonds in a particular tranche, you have two options to invest in these bonds:

  • You can wait till the RBI announces a new tranche, or
  • You can purchase existing SGBs from other investors either through a physical transfer or via the stock exchange

Currently, all of the SGB tranches for the financial year 2023-2024 have been subscribed entirely. The subscription window for the final tranche of the 2023-24 series lasted from February 12, 2024, to February 16, 2024. The allotment to successful applicants in these tranches was done on February 21, 2024.

The Reserve Bank of India is expected to announce new tranches for the financial year 2024-2025 along with their respective subscription windows after April 1, 2024.

  • Safety

Since physical gold is tangible, it is important to store it safely. Storing large quantities of gold at home could be very risky because of the possibility of loss or theft of the precious metal. Although you could safely store gold in a bank locker, the costs associated with leasing the locker are likely to reduce the overall returns you earn from your investment.

Sovereign Gold Bonds, however, are comparatively less risky. Although the physical versions of these bonds may also be susceptible to loss, theft and mutilation, you can easily circumvent these risks by opting to store them electronically in your demat account. Holding SGBs in a demat account eliminates all concerns regarding storage and security.

  • Investment Limit

As long as you are capable of explaining the source of income used for buying physical gold, there’s no maximum limit to the amount of precious metal you can purchase. However, if you are unable to produce proof of the source of income, the following limits will apply.

  • Married women: Up to 500 grams of physical gold
  • Unmarried women: Up to 250 grams of physical gold
  • Married or unmarried men: Up to 100 grams of physical gold

The above limits have been specified by the Central Board of Direct Taxes (CBDT) via Instruction No. 1916, dated 11-5-1994.

With Sovereign Gold Bonds, you need to adhere to both minimum and maximum investment limits. The minimum investment limit is 1 gram of gold, whereas the maximum investment permitted is 4 kilograms (4,000 grams).

Although the maximum investment limit of SGBs may seem restrictive, it is essential to note that the 4-kilogram limit is set per individual. If you wish to invest more than the maximum investment limit, you could consider investing in Sovereign Gold Bonds separately under each of your family members’ names. For example, if your family consists of four individuals, you could purchase up to 16 kilograms (16,000 grams) worth of SGBs.

Note: This maximum investment limit of 4 kilograms applies to both individuals and Hindu Undivided Families (HUFs). If the investor is a trust or any other similar entity, the maximum investment limit is capped at 20 kilograms (20,000 grams).

  • Affordability

Physical gold, especially ornaments and jewellery, entails additional costs such as designing charges, making charges and wastage. As a result, such assets are generally sold at a premium to the prevailing gold price. If you’re buying physical gold to hold it as a long-term investment, these additional costs could potentially reduce your overall returns.

Sovereign Gold Bonds, however, are generally sold at or very close to the prevailing price of gold at the time of issue. This makes them a more cost-effective option if you’re considering investing in gold for long-term wealth creation. Furthermore, when you invest in SGBs, you also earn nominal interest on your investment amount at a rate of 2.5% per annum. This interest increases the overall return on investment in SGBs when compared to physical gold.

  • Lock-In Period

One of the many perks of buying physical gold is that there is no lock-in period involved. You can monetise the gold you own by selling or pledging it at any point in time without any restrictions whatsoever. Such flexibility makes physical gold a good investment option for both the short and long term.

Sovereign Gold Bonds, on the other hand, have a fixed tenure of 8 years. However, the upside is that you have the option to redeem the bonds prematurely after 5 years from the date of the first investment. You can redeem the bonds by transferring them to another investor in exchange for cash, or you could trade them on a stock exchange if you hold the bonds electronically in your demat account.

That said, even with the early redemption clause, the minimum tenure for which your investment in SGBs would be locked in is 5 years. This makes them better suited for long-term financial goals and milestones.

  • Taxation

The returns you get from your physical gold investment are considered to be capital gains. Depending on how long you hold the gold, the profits on the sale of the asset can be categorised as either long-term or short-term capital gains.

If your total holding period is less than 36 months, the profits are categorised as short-term capital gains. In this case, the gains are added to your total income and are taxed at the income tax slab rate applicable to you. However, if your total holding period is 36 months or more, the profits are categorised as long-term capital gains and are taxed at a flat rate of 20%.

The returns from Sovereign Gold Bonds are taxed differently. The interest you earn from your SGB investments is added to your total income and taxed at the income tax slab rate applicable to you. As for the profits on the redemption of your SGB investments, if any, they are automatically categorised as long-term capital gains since the minimum period of investment is 5 years.

If you redeem your SGB investments prematurely before the end of the 8-year tenure, you need to pay long-term capital gains tax at a flat rate of 20% with indexation benefit or at a rate of 10% without indexation benefit. However, if you hold the bonds for the entire tenure of 8 years, the capital gains you receive are completely exempt from taxation.

Sovereign Gold Bonds vs Physical Gold At a Glance

Now that we’ve seen the key points of difference in the SGB vs physical gold comparison, here is a quick overview of these two investment options.

ParticularsSovereign Gold Bonds Physical Gold
FormCan be held as physical certificates or electronically in a demat accountExists in a tangible form, such as coins, bars, ingots, ornaments or jewellery
Availability Limited availability; issued in tranches during each financial year and can be applied only during the specified subscription windowReadily available and can be purchased at any point in time
InterestOffers nominal interest at the rate of 2.5% per annum for the entire tenureDoesn’t generate any interest income
Safety Eliminates all concerns regarding storage and security if held electronically in a demat accountRequires extensive storage arrangements
TenureHas a tenure of 8 years with the option to redeem prematurely after the expiration of 5 years from the date of investmentNo tenure; can be held indefinitely
Investment HorizonIdeal for investors with a long-term investment horizonIdeal for investors with both short-term and long-term horizons
Liquidity Dependent on market demand and trading volumes on the stock exchangeVery high liquidity; can be traded instantly
TaxationExempt from capital gains tax if held for the entire tenure of 8 yearsSubject to either short-term or long-term capital gains tax, depending on the holding period
Price Transparency Pricing is transparent and is based on the prevailing gold prices at the time of the issue of the bondPricing is not as transparent as SGBs since it may involve additional costs like making charges, wastages and designing charges
RiskCarries zero default risk since the bonds are backed by the Government of IndiaSubject to risks such as theft or loss

The Bottom Line

Sovereign Gold Bonds and physical gold are two different ways to invest in the precious metal. Although physical gold offers benefits like universal acceptance and liquidity, storing large quantities safely may pose a major challenge. SGBs, meanwhile, can be stored in electronic form in a demat account, provide periodic interest income and offer various tax benefits like indexation and exemption.

As an investor, you must carefully consider the various features of these two investment options before making a decision. Also, remember to factor in aspects such as your preferences, investment objectives and risk tolerance. This should help you make a decision that is aligned with your goals.

Invest in Sovereign Gold Bonds through the Samco Trading App

If you’re planning to invest in Sovereign Gold Bonds in a seamless and hassle-free manner when the next tranche is announced, the new-gen trading app from Samco Securities may be just what you need. Thanks to the trading app’s intuitive and easy user interface, it only takes a few simple steps and a couple of minutes to apply for SGBs. Once the bonds are allotted, they’re automatically transferred to the demat account you hold with Samco.

If you don’t have a trading and demat account with Samco Securities yet, you can easily open one today before the next tranche of the Sovereign Gold Bonds is announced by the RBI. This way, you can ensure that you have the account up and running by the time the subscription window opens.

In addition to giving you access to Sovereign Gold Bonds, the trading and demat account from Samco Securities also allows you to invest in other popular financial instruments such as stocks, debt instruments, mutual funds and derivative contracts like futures and options.

Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847

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