October 09, 2025
7 mins read
If you're considering gold as part of your portfolio, consider weighing the options between Sovereign Gold Bonds (SGBs) and physical gold. Both options offer exposure to gold prices, but they differ significantly in terms of form, returns, tax treatment, and liquidity. Understanding how they work can help in comparing their features without overgeneralizing one as superior to the other.
SGBs are government-issued securities, while physical gold refers to actual possession in the form of jewelry, coins, or bars. The choice often comes down to convenience, investment goals, and personal preferences.
Gold can be held in multiple ways, each having its own nature and implications:
Physical Gold: Tangible gold held as jewelry, bars, or coins.
Sovereign Gold Bonds (SGBs): Digital or certificate-based government securities that track the price of gold and offer interest.
The key difference lies in the medium. Physical gold offers ownership in hand, while SGBs provide dematerialized ownership with added interest. These differences shape how both options are treated in terms of taxation, returns, and maintenance.
SGBs are issued by the Reserve Bank of India on behalf of the Government of India. They come with a fixed tenure, usually 8 years, and carry an annual interest of 2.5% paid semi-annually.
No storage hassle: Held in demat or certificate form.
Fixed interest: Offers 2.5% annual interest on the investment amount.
Tenure: Maturity period of 8 years with exit options after the 5th year.
Redemption: Based on the prevailing market price of gold.
Eligibility: Available to Indian residents, including individuals, HUFs, trusts, and universities.
The value is linked to 24K gold prices published by the India Bullion and Jewellers Association (IBJA).
Interest Income: Investors earn 2.5% annual interest in addition to any capital appreciation.
Tax Benefit on Maturity: If held till maturity, the capital gains are tax-free.
No Making Charges: Unlike jewellery, there are no manufacturing or design costs.
Safety and Security: SGBs mitigate risks such as theft, loss, or wear and tear.
No Storage Costs: SGBs are stored digitally or in certificate form, avoiding locker fees.
These benefits may appeal to those seeking regulated and trackable instruments.
Lock-in Period: SGBs have a fixed tenure, with early exit allowed only after 5 years.
Liquidity Concerns: SGBs can be traded on exchanges; however, the secondary market may exhibit low liquidity.
Capital Loss Risk: If gold prices fall, investors may incur capital loss.
Non-Transferable in Some Cases: Certain SGBs bought via specific platforms might not be freely transferable.
Limited Issuance Window: SGBs are issued in tranches and may not be available on demand.
Physical gold refers to purchasing jewellery, coins, or bullion and holding it directly. It has been a traditional form of wealth storage and is widely accepted for cultural and personal uses.
Ease of Access: Available in local markets and online platforms.
Ownership Control: Direct access and control over possession.
Cultural Significance: Commonly gifted or used in festivals and ceremonies.
Despite the tangible appeal, it carries cost and safety implications.
Immediate Liquidity: Physical gold can be sold or pledged quickly at market rates.
Universal Acceptance: Can be exchanged or sold in most parts of the country.
Tangible Asset: Gives psychological assurance of holding a real asset.
No Maturity Restriction: Unlike SGBs, there’s no lock-in tenure.
Cultural Flexibility: Often used in personal occasions and events.
These advantages align well with traditional preferences and practical flexibility.
Storage Costs: Requires physical space or bank lockers, which come with associated costs.
Risk of Theft: Physical possession involves the risk of theft or misplacement.
No Interest Income: Unlike SGBs, physical gold doesn’t generate periodic returns.
Making Charges: For jewellery, additional charges are included in the purchase price.
Tax on Gains: Capital gains on sale are taxable, and there’s no exemption for long-term holding like in SGBs.
If you’ve read this far, you probably see that both Sovereign Gold Bonds and physical gold have their structures and implications. Whether one works better than the other often depends on how long you want to hold it, whether you need physical access, or if earning interest matters to you.
SGBs eliminate the need for storage and offer additional returns, but they involve a longer lock-in period. Physical gold provides immediate access and cultural utility, but it also incurs costs and raises security concerns. Knowing the differences can help you evaluate both options on their merits.
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Sovereign Gold Bonds (SGBs) are generally better for long-term investors. They offer 2.5% annual interest, capital gains tax exemption on maturity, and eliminate storage risks. Physical gold, while tangible, involves making charges, storage costs, and lacks interest income.
No, SGBs cannot be converted into physical gold. They are financial instruments representing gold value, not redeemable in metal form. On maturity, investors receive the market value of gold in rupees, along with accrued interest, directly credited to their bank account.
Goldbees (Gold ETFs) are more cost-effective than physical gold. They offer better liquidity, no storage hassles, and track gold prices. While physical gold is preferred for jewellery or emotional value, Goldbees are ideal for transparent, low-cost investment purposes.
The choice depends on goals. Gold offers stability and acts as a hedge against inflation, while bonds provide fixed income. For wealth preservation and diversification, gold works well. For regular income and lower risk, bonds are generally preferred.
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