In India, gold is symbolic of prosperity and auspicious beginnings. It is also seen as a financial safeguard in times of inflation. While buying physical gold, such as jewellery and coins is popular, the digital era has introduced far more efficient ways to invest in this precious metal.
There are many ways to invest in gold. You can buy physical gold in the form of jewellery, gold coins, or biscuits. Alternately, you can also invest in intangible forms of gold, such as Sovereign Gold Bonds (SGB) and Gold ETFs. But is one better than the other? This is what we’ll break down for you in this article.
Sovereign Gold Bonds and Physical Gold – The Basics
Sovereign Gold Bonds (SGBs) are debt securities issued by the Reserve Bank of India (RBI) on behalf of the government, with each unit denoting a gram of gold. These bonds offer the flexibility of trading in the secondary market, providing investors with the opportunity to accrue capital gains. The interest on SGBs is fixed, ensuring a predictable income stream.
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You can buy physical gold through several avenues, including jewellery, bullion, or coins. However, investing in physical gold comes with additional expenses like storage fees and making charges, particularly in the case of jewellery. When investing in gold in the form of jewellery, it is crucial to assess the metal’s value in terms of weight and purity. Generally, 24 Karat gold is considered pure. These are some of the factors to consider before investing in physical gold.
SGBs vs Physical Gold: Features and Benefits
Safety
Unlike physical gold, SGBs do not carry any risk of theft or robbery for they are a digital form of gold, traded via demat accounts.
Interest
SGBs provide an annual interest of 2.5% which give it an edge over investing in physical gold.
Investment Limit
The minimum investment in SGBs is one gram. Individual and Hindu Undivided Family (HUF) investors can invest up to a maximum of 4 kilograms in SGBs, while the maximum government-notified limit for trusts and entities is capped at 20 kilograms. SGBs allow for individual and joint holdings, with the prescribed limit applying to the first applicant in the case of joint applications. On the other hand, there is no limit on how much physical gold you can hold.
Affordability
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Physical gold, especially in the case of jewellery, is expensive to hold, considering making/designing charges and TDS. But the value of SGBs is closer to the actual price of gold, making them a comparatively cheaper way to invest in gold. .
Gold As Collateral
Certain banks recognise and accept Sovereign Gold Bonds (SGBs) as collateral or security for secured loans. Following the establishment of the loan-to-value (LTV) ratio, determined by the India Bullion and Jewellers Association Limited, these bonds can be treated as a form of gold which banks and financial institutions may be able to offer loans against. As for physical gold, many banks and financial institutions offer loans against gold ornaments, coins and bullion.
Lock-in period
Sovereign Gold Bonds come with an investment tenure of eight years. But investors may request to withdraw from the investment after a holding period of five years. It is, thus, important for you to align your investment strategy accordingly. If your financial goals extend beyond this period, investing in Sovereign Gold Bonds is prudent. On the other hand, there is no lock-in period for investing in physical gold.
Liquidity
SGBs feature a lock-in period of five years before they can be withdrawn or traded in the secondary market. On the contrary, you can easily buy or sell physical gold at any bank or jewellery shop at any time, in case you have a liquidity requirement.
Taxation
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The interest earned from Sovereign Gold Bonds (SGBs) falls under the purview of taxable income as per the Income Tax Act of 1961, without any provision for tax deductions on the investment. However, if you hold on to your SGBs for the entire eight-year tenure, you become eligible for an exemption from capital gains tax. Additionally, the long-term capital gains or transfers of bonds from one party to another makes them eligible for indexation benefits. In essence, holding onto your SGBs for the entirety of their tenure not only brings capital gains tax relief but also allows for potential advantages through indexation in certain scenarios.
According to the Income Tax Act, when you sell physical gold which you have held for 36 months or more, it is classified as long-term capital gains (LTCG) on which a 20% tax is applicable, along with a 4% cess. Gold held for a period less than 36 months falls under short-term capital gains (STCG) and is subject to taxation based on your applicable tax slab.
What Should Be Your Gold Investment Strategy?
In the realm of gold investments, the allure of digital gold has gained momentum. It offers accessibility, allowing investors to buy gold in small quantities. However, the key lies in balance. Diversification is essential – don’t put all your financial eggs in one basket. Gold is a good option to have in your portfolio, especially in times of market volatility, but limit your exposure to not more than 10%, be it physical or digital. Lastly, remember that moderation and diversification are the cornerstones of a resilient investment strategy.
