Sovereign Gold Bonds vs Physical Gold – Which one is better for you?

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Published: July 24, 2020 3:56 PM

Having said that, one of the main disadvantages is that the resale value of this form is comparatively lower than other forms of gold. Additionally, the purity of gold being bought can also be a big concern.

gold, gold investments, physical gold, gold jewellery, options to invest in paper gold, Gold ETF, Gold Mutual Funds, Sovereign Gold Bond, MMTC-PAMP digital goldExperts say an investor should choose between these options carefully as they come with specific features and drawbacks.

While investing in gold most investors are faced with the option to choose from holding gold in physical form or digital form. Investment in gold can be made in various forms, include physical gold, exchange-traded funds (ETFs), and Sovereign Gold Bonds (SGBs).

Having said that sovereign gold bonds (SGBs) and gold ETFs and funds score higher on quality, ease of holding the investment and safety. Experts suggest an investor should choose between these options carefully as they come with specific features and drawbacks.

Physical gold

Gold in physical form is the most favoured form of gold investment in India, being a tangible asset. It can be bought in the form of gold jewellery or gold biscuits, gold coins, etc. With physical gold, it is one of the few assets which can be kept confidential and completely private unlike other forms of gold. Physical gold can also be bought with without the help of a broker or any other intermediary to fulfil the contractual obligation of purchasing the asset, hence, no counterparty risk is involved.

Having gold in one’s portfolio helps in diversification, and is always suggested by financial advisors. Experts suggest investors should have around 20 per cent of gold in their portfolio. The yellow metal is seen as a hedging instrument, rather than a wealth-creating instrument in an investor’s portfolio. Gold is comparatively a stable investment during market volatility, and it helps investors fight the impact of inflation and economic uncertainties.

As gold is universally accepted as money across the world, in case of an emergency, one can always sell their gold biscuits/bricks, gold coins to get instant cash.

Even though there is no limit to buying physical gold, investors should always keep proofs of their gold investments (the tax invoice issued by the jeweller in case of jewellery) for income tax purposes. To avail the taxation benefits of gold, investors can get the benefit of long-term capital gains (LTCG) if the gold is held for a period of more than 3 years. With indexation benefit, these gains are taxed at 20 per cent along with surcharge, if any, and cess at 4 per cent.

Having said that, one of the main disadvantages is that the resale value of jewellery is comparatively lower than other forms of gold. Additionally, the purity of gold being bought can also be a big concern.

Sovereign Gold Bonds

Sovereign Gold Bonds (SGB), are Government security bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. SGBs are issued in multiples of one gram of gold and are traded on an exchange. These bonds can also be used as collateral for taking loans, similar to physical gold. Having said that, unlike physical gold the risk of theft is low with gold bonds. Additionally, gold bond prices are linked to the price of gold of 999 purity (24 carats) published by India Bullion and Jewellers Association (IBJA), hence, the purity is not of concern.

The government offers a fixed assured rate of interest 2.5 per cent per annum on the issue price, which is paid half-yearly. The last instalment is paid on maturity along with the principal.

With Sovereign Gold Bonds, TDS is not applicable on the interest. The capital gains tax on redemption has been also been exempted for individuals, according to an RBI notification. On transfer of bonds, indexation benefits will be provided in case of LTCG arising to an investor.

Liquidity with these bonds can be an issue. It is so because the bonds come with a tenor of 8 years, and a lock-in period of 5 years. An investor can only withdraw money from the 5th year on the date on which the interest is payable.

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