Sovereign Gold Bond Vs Physical Gold: Which Is A Better Investment Choice?

The Sovereign Gold Bond (SGB) Scheme 2021-22 - Series X opened for subscription on February 28 and will remain open till March 4. The price of gold has been set at Rs5,109 per gram by the Reserve Bank of India (RBI). While more and more investors are opting for digital gold over physical gold, but for many, confusion persists. Here’s a comparison of SGBs and physical gold to help you make a choice. 

SGBs Versus Physical Gold   

SGBs are government securities denominated in grams of gold. The scheme was introduced in 2015 by the Government of India. The bonds are considered as substitutes for holding physical gold. Investors need to pay the issue price in cash and the bonds can be redeemed in cash on maturity. RBI issues the bonds on behalf of the government. Investors will receive the ongoing market price at the time of redemption, apart from the interest. 

Attachment To Physical Gold: Many experts believe that Indians have a preference for physical gold as they attach sentimental value to it. “Gold is predominantly the first preference of investment in a country like India. However, SGBs, are a virtual gold investment backed by a bank and earns simple interest of 2.5 per cent,” says Shivansh Bhasin, founder and CEO, Investrology, a wealth management firm. The interest is paid half-yearly and is taxable.   

No Storage Cost: Most Indians tend to keep their gold in lockers at home or banks, which means there is a storage cost involved. But in SGB, there is no such additional cost involved, which makes it a better investment choice. “Investing in paper gold (SGBs) is a better option also because there aren’t any making charges as there are with gold jewelry,” says Nish Bhatt, founder and CEO, Millwood Kane International, an Investment consulting firm.  

Purity Not A Concern: One of the major concerns while buying physical gold is the risk of getting low-purity metal, especially when the units are not hallmark certified. But for SGBs, investors do not face such concerns. 

Demat Account Needed: While you don’t need a demat account to buy digital gold, having one makes receiving the returns easier. “The gold units are allotted based on the investment amount and these units are credited into the demat account. If you do not have a demat account, the bonds can also be issued in physical and e-certificate form as well,” adds Harshad Chetanwala, co-founder of MyWealthGrowth.com, a financial advisory firm.   

Taxation: The interest earned is taxable as per the income slab of the investor. “But if you sell the SGB after eight years (lock-in period), the whole capital gain will be exempt. Thus, for all practical purposes, physical gold is an investment with sluggish growth,” says Bhasin.