How does Digital Gold compare with Sovereign Gold Bonds?

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June 07, 2021 12:09 PM

The Covid-19 pandemic has turned investors' attention towards various asset classes. Industry experts say non-physical gold assets such as digital gold and Sovereign Gold Bonds are a few of them.

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The Covid-19 pandemic has turned investors’ attention towards various asset classes. Industry experts say non-physical gold assets such as digital gold and Sovereign Gold Bonds are a few of them.

Digital gold is like ‘physical gold’ but without the added issues of safekeeping and storage. There are no compromising risks on the purity of gold. Three companies – Augmont, MMTC-PAMP and SafeGold – that currently offer digital gold in India store equal amounts of physical gold is insured vaults. Digital gold can be bought in small units on multiple online platforms, however, there is a limit of Rs 2 lakh. Most providers have a clause for a mandatory exit or for taking delivery of the physical gold after a fixed period of time.

Sovereign Gold Bonds (SGB) is issued by the RBI on behalf of the Central government at a discount to the current market price for a holding period of 8 years. Experts say these investment options are convenient and fulfil people’s aspirational and financial needs of buying gold.

Ashraf Rizvi, Founder and CEO, Digital Swiss Gold and Gilded says, “Digital gold provides more benefits than SGBs to the buyer. With digital gold, you buy the actual value of gold which is stored in physical form in a vault. Digital gold comes with insurance of the full value invested, unlike SGBs. Liquidity is also a major differentiator. Digital gold can be solved at market price in case of emergencies but SGBs come with a holding period of a minimum of five years, making them unavailable for immediate cash/financial needs of the investor.”

On the other hand, Digital Gold is available 24*7. Investors can buy a large sum in one go or make small investments spread over a week or months, depending on his/her purchasing power. The quality of digital gold stands higher at 0.9999 as compared to that of SGB at 0.999.

Having said that, Anup Bansal, Chief Investment Officer, Scripbox says, “there are no storage costs or GST charges on SGB. Digital gold, on the other hand, charges 3 per cent GST, which essentially means that on every Rs 100 purchase the net amount invested is Rs 97. There’s also a significant difference between the buy and sell price, about 2-3 per cent for storage, insurance and trustee fees. The Government also pays 2.5 per cent annual interest on SGB.”

Rizvi further adds, “Even after the minimum holding period of five years, SGB takes another 3 years to fully mature. There’s no additional costs or deduction when reselling digital gold, but there are hefty transaction costs in case the bonds are sold off before maturity. With Sovereign Gold Bonds there’s a cap on the maximum investment on SGBs and their subscription window is short.”

Another point of comparison, Bansal makes, “digital gold is taxed like physical gold, whereas there is no capital gains tax on SGB if held for more than 5 years after buying in the IPO. This is one drawback of SGB – the lock-in period of 5 years. Between 5 and 8 years investors can sell in the secondary market, however, the selling price may be at a discount. Currently, there is no regulator for digital gold but SGB does have a sovereign guarantee.”

Experts say digital gold makes for an attractive long-term asset when compared to the various aspects of convenience, costs, expected return, taxation, liquidity, and safety. The main benefits of SGBs continue to be the 2.5 per cent interest and tax-free status.

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