Physical Gold vs Sovereign Gold Bonds vs Gold ETFs: What Should You Bet On?

Gold has been one of India's most trusted investment choices, a tradition that spans generations. Reports estimate that Indian households hold nearly $3.8 trillion worth of gold, accumulated over the years.  

As the festive season approaches, the demand of gold naturally picks up. However, with the rising price of physical gold, many investors are now turning to digital or paper forms of gold, such as Sovereign Gold Bonds (SGBs) and Gold Exchange Traded Funds (ETFs).  

But in between physical gold, Sovereign Gold Bonds and Gold ETFs, which one should you pick? Which offers better returns and tax advantages? Let’s break it down and help you find the gold investment that suits you best. 

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Physical gold is one of the simplest and traditional ways of investing in gold. It is widely acceptable for personal or ceremonial purposes, such as weddings.  

Apart from jewellery, you can invest in physical gold through bars and coins from a bank or a reputable dealer. Jewellery holds a cultural value and can be worn as well. While purchasing physical gold, a 3% GST is levied. However, if you're purchasing gold jewellery, an additional GST starting from 5% is levied for the making charges. So, if you are buying jewellery, you are paying a higher amount than the actual price of gold. These additional costs make physical gold more expensive than digital gold.  

Gold ETFs a Safe Haven?

Gold Exchange Traded Funds (Gold ETFs) are passive investment instruments that are based on gold prices and invest in gold bullion. There is complete transparency in holding a gold ETF because of its direct gold pricing. As of now, if the holding period is less than 12 months, STCG tax will be applied on the gains. This means the gains will be taxed as per the tax slab of the taxpayer. And if you are holding more than 12 months, your gains will be taxed at 12.5%.  

Traded in stock exchanges like NSE and BSE, gold ETFs offer a convenient and cost-effective way to invest in the yellow metal. ETFs offer liquidity, as the stock can be bought or sold easily through stock exchanges at any time during market hours. The pricing of these ETFs is transparent and easy to track, and investing in gold ETFs requires minimal investment knowledge. As a cherry on top, gold ETFs can help investors reduce the overall risk in their investment portfolio.  

Should You Bet On Sovereign Gold Bond Scheme? 

SGBs are government securities denominated in grams of gold issued through the Reserve Bank of India. Like ETFs, these are used as substitutes for holding physical gold. Investors must pay the issue price in cash, and the bonds will be redeemed in cash on maturity.  

Even though the maturity of the bond is 8 years, early encashment of the bond is allowed after the fifth year from the date of issue on coupon payment dates. The bond will be tradable on exchanges, if held in demat form. The minimum investment in the bond is one gram, and the maximum limit of  subscription is 4 KG. Just like ETFs, the gains will be taxed at slab rates, if the holding period is less than or equal to 12 months. And a 12.5% tax will be applied if you hold SGBs for a period of more than 12 months. However, The government stopped issuing new SGBs due to the high cost of borrowing.