Gold is always a dear investment choice for Indians for its timeless value and stability. Gold is also a principal commodity for global trade. As a retail investor, it is always a tough choice if you have to decide between investing in physical gold or Sovereign Gold Bonds, but this can be solved if you keep your financial goals at the forefront while weighing the pros and cons of each.
This article delves into the nuances of both choices, comparing the merits and drawbacks of physical bullion and SGBs.
Understand Sovereign Gold Bonds (SGB)
SGBs are a type of Government bond issued by RBI on behalf of the Government of India at an issue price. These bonds are denominated in multiples of gram(s) of gold with a minimum basic investment equating to 1 gram of gold. It offers a bond interest rate of 2.5% pa over and above possible gold price appreciation. RBI issues SGBs in 2 to 3 tranches during the financial year. These bonds have a maturity of 8 years with a lock-in period of 5 years. At the time of maturity, the bonds would be automatically redeemed, and you would receive returns based on the prevailing price of gold.
Benefits of Investing in Sovereign Gold Bonds (SGB)
- Sovereign Guarantee: This simply means it is backed by the government of India and an assurance is provided that the financial obligation associated with it will be fulfilled. This substantially reduces the risk to almost zero.
- Pays Interest: SGBs offer interest of 2.5 percent per annum if you are holding more than Rs. 1 lac, and the interest is paid semi-annually.
- No Additional charges: While physical gold in jewellery attracts hefty making charges as well as GST which may add up to an additional 15-30% on your purchase value, this can be eliminated in the case of SGBs.
- Tax Exemptions on Capital Gains: You will enjoy tax benefits on capital gains made upon maturity. If held until maturity (eight years), the capital gains on redemption are entirely tax-free.
- Online Buying Discount: Reserve Bank of India (RBI) RBI gives a discount of INR 50/- per gram if we purchase Sovereign Gold Bonds via mobile banking or online bond platforms.
While we have discussed the key benefits of investing in SGBs, it also comes with certain risks like liquidity risk and market volatility risk.
In the case of selling SGBs between 5 to 8 years, a Long-Term Capital Gains (LTCG) tax of 20% is applicable. Additionally, the interest earned is subject to taxation based on the investor’s applicable income slab rates.
The Pros & Cons of Investing in Gold in its Physical Form
Physical gold has global recognition and liquidity making it easy to sell, and its ownership provides a sense of control and security. However, it is equally essential to understand the risks associated with it before we conclude.
Why should you think twice before investing in physical gold?
- Higher transaction cost: Hefty-making charges levied by the jeweller, and GST, add to the overall cost which makes it a loss-making investment if held for the short term. Not only this at the time when you are selling gold you end up paying dealer commissions.
- Storage costs and security concerns: Renting a safe locker to store gold can be an expensive affair and if stored at home comes with a risk of being lost or stolen.
- Lack of quality assurance & cheating: While the government has implemented strategies to standardize the quality of gold across the country, there are still concerns regarding the same in the consumer’s mind.
- Returns on liquidation only: Unlike SGBS, the returns on physical gold can only be realised when you sell it, however on SGBs you earn regular fixed-income and automatic liquidation in 8 years.
The Paramount Query: Which option should you opt for?
It purely depends on your investment goals, asset allocation, risk appetite, liquidation priorities, and current life stage. For example, if you are looking forward to getting your children married soon physical gold in the form of jewellery would make more sense for you as gifts when compared with gold bonds.
If you are one who is investing in gold for long-term and looking for a low-cost government-backed investment option, SGBs could be great option in terms of secure returns.
Where to buy sovereign gold bonds?
If you have decided to go for SGBs it is not very complicated to buy them. You can purchase SGBs through online bond platforms, banks, or brokerage houses.
