Sovereign Gold Bond Vs. Gold ETF: Where should you invest?

With numerous investment options, picking the right one can sometimes be confusing. However, for Indians, gold has always been an integral financial asset. Physical gold has dominated Indian culture and is widely used across states and faiths. Newer forms of gold are also gaining traction. Two of these – SGBs (Sovereign Gold Bonds) and gold ETFs (Exchange-Traded Funds) have particularly attracted some attention. Let’s find out the differences between the two, so you can decide the suitable option out of the two for your needs and goals.

Sovereign Gold Bonds Vs. Gold ETFs

Here are some differences between the two:

Points of difference SGBs Gold ETFs
Meaning SGBs are issued by the Reserve Bank of India (RBI) and are a type of government security. They were launched as a substitute for physical gold to reduce the demand for it. Gold ETFs are a type of open-ended mutual funds online scheme that invests in gold bullion. Each unit of a gold ETF represents one gram of physical gold with a purity of 99.5%.
Interest rate These bonds offer a flat rate of interest of 2.5% per annum. This is offered to investors semi-annually. The value of a gold ETF fluctuates on the basis of actual gold prices and can differ based on various factors.
Investment values and process The minimum investment in SGBs can be 1 gram of gold, and the maximum can be 4 kgs for individuals and Hindu Undivided Families (HUFs). The maximum limit is increased to 20 kgs for trusts and other similar entities.

You can invest in SGBs through banks, post offices, agents, etc.

The minimum investment in gold ETFs can be 1 gram of gold. However, there is no maximum limit. Since these are traded on the stock exchanges like stocks, you can buy and sell them as per your goals and preferences without limitations. You can also invest in them through a SIP (Systematic Investment Plan) or in a lump sum.
Lock-in period SGBs have a lock-in period of five years. Gold ETFs have no lock-in periods.
Tenure SGBs have an investment term of 8 years. However, they offer premature withdrawals from the fifth year. Gold ETFs have no tenure. They are bought through a Demat account and stored there until you sell them.
Taxation The redemption amount of SGBs is exempt from capital gains taxes. However, the interest earned is taxed as per the provisions of the Income Tax Act, 1961. Additionally, you get indexation benefits on long terms capital gains in the case of a transfer of the bond. The tax on gold ETFs is similar to how you would pay tax when you invest in debt mutual funds online. Gains held for three years or more are taxed as Long-term Capital Gains (LTCGs) at 20% with indexation benefits. And, gains held for less than three years are taxed as Short-term Capital Gains (STCGs). These are added to your taxable income of the year and taxed according to your income tax slab.

To sum it up

Now that you know the differences between gold ETFs and SGBs, you can make a choice based on your distinct requirements. Once you have made up your mind, you can download the Moneyfy app and start investing!

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