Gold and Sovereign Gold Bonds: A comparative analysis
Physical gold and sovereign gold bonds are both investment options that allow investors to participate in the gold market. However, they are characterised by different features:
- Possession: Gold refers to the metal that is possessed in the form of bars, coins, or jewellery. On other hand, sovereign gold bonds are held in the paper form or electronic form held in demat account, issued by the Government. This means sovereign gold bonds do not involve the hassle of storage and security.
- Returns: The returns of physical gold only depend on the prevailing gold prices whereas SGBs will give investors a fixed interest rate of 2.5% per year, paid every six months, based on the initial investment amount. The redemption price of SGBs will be based on the simple average of the closing price of gold with 999 purity for the previous three working days, as published by IBJA Ltd.
- Loan-to-Value (LTV) Ratio: Both physical gold and SGBs can be used as collateral for loans. The LTV ratio for physical gold may vary depending on factors such as purity and market conditions, while the LTV ratio for SGBs is typically aligned with standard guidelines set by the Reserve Bank of India.
- Taxation: Interest earned on SGBs will be subject to taxation in accordance with the provisions of the Income Tax Act, 1961 (43 of 1961). However, any capital gains tax arising from the redemption of SGBs by an individual will be exempted. Additionally, long-term capital gains arising from the transfer of SGBs will be eligible for indexation benefits for any person. Capital gains tax is applicable on sale of physical gold.
Gold vs Sovereign Gold Bonds: Which investment option is right for you?
Investing in sovereign gold bonds seems to be a better choice compared to holding physical gold given the ease of safety and security, and overall financial benefits. As they are issued by the RBI, sovereign gold bonds offer protection against default risks as they exist in digital form in demat account.