Differences Between Sovereign Gold Bond (SGB) and Fixed Deposit (FD)

difference between sgb and fixed deposits

For investors, SGB and fixed deposits are two options that often feel like safe first steps. A Sovereign Gold Bond (SGB) is a government-sponsored scheme where you can invest in gold in paper form and also earn interest each year.

A fixed deposit (FD) is a risk-free investment where you keep money with the bank for a specified duration. While SGB and FD both assist you in increasing your money, they function differently. So, let's understand their major differences and assist you in determining which is ideal for you.

Table of Contents

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What is SGB?

A Sovereign Gold Bond (SGB) is a government-backed financial product issued by the Reserve Bank of India. It allows you to invest in gold without the physical buying or storage. One bond equals 1 gram of gold and is offered in denominations like 1 gram and 10 grams. The bonds have a fixed maturity of 8 years, with the option to exit after the 5th year.

SGBs pay 2.5% interest annually, which is paid every 6 months, plus you will get the market value of gold at maturity. Individuals and HUFs can invest a maximum of 4 kilograms (worth of SGB) in a financial year.  For trusts and other entities, it is 20 kilograms per financial year.

What is FD?

Fixed Deposit (FD) is an investment where you invest a lump sum with a bank or financial institution for a specified period. In return for your investment, you receive a guaranteed, fixed interest rate for the entire investment duration. FDs are available from various banks, Non-Banking Financial Companies (NBFCs), and Housing Finance Companies (HFCs).

The bank has devised a range of interest rates, currently between 3% and 7.5%, depending on the FD length and the bank. You can withdraw or reinvest the amount, earning further interest on the matured amount as well.

Key Differences Between Sovereign Gold Bond vs Fixed Deposit

SGB and FD are popular, low-risk investments. While SGBs offer returns based on gold prices plus interest, FDs provide fixed returns. This comparison table highlights their key differences, helping you make an informed decision:

Parameter SGB FD
Meaning Government-backed financial product that represents an investment in gold without holding physical gold. A low-risk investment where a lumpsum is deposited for a fixed tenure at a predetermined interest rate.
Issuing Authority Reserve Bank of India (RBI) on behalf of the Government of India. Banks, NBFCs, and Housing Finance Companies (HFCs).
Risk Involved  Linked to gold price fluctuations; however, capital is government-backed and relatively safe. Very low-risk; both capital and interest are fixed and guaranteed.
Lock-in Period 8 years (with exit option after 5th year on interest payout dates). 7 days to 10 years (varies by bank/NBFC).
Interest Payout & Returns 2.50% per annum (paid half-yearly). 6%–8% per annum (fixed, varies by bank & tenure). Senior citizens get 0.25% to 0.75% extra returns.
Senior Citizen Benefits No additional interest for senior citizens. Extra 0.25% to 0.75% p.a. over regular FD rates.
Accessibility Commercial banks, designated post offices, and through online platforms, like internet banking. You can access it from banks and post offices.
Investment Horizon Best suited for medium to long term (5–8 years). Flexible, can hold for short, medium, or long term.
Maturity Period  8 years maturity period with an exit option in 5 years on interest payout dates. It ranges from 7 days to 10 years, depending on the investor’s choice.
Liquidity High liquidity. Tradable on stock exchanges with premature withdrawal after 5 years Less liquid; premature withdrawal possible (may attract a small penalty).
Loan Against Investment It can be used as collateral for loans from banks and financial institutions. Allowed; banks offer loans against FDs (up to 90% of the FD value).
Taxation The annual interest of 2.5% is taxable at your marginal tax slab rate, while capital gains on redemption after 8 years are exempt for individuals.
  • Normal FD: Interest taxable as per the slab. TDS after ₹50,000 (₹1 lakh for seniors).
  • Tax Saver FD: Investment eligible for ₹1.5 lakh 80C deduction. Interest is taxable as per the slab. TDS after ₹50,000 (₹1 lakh for seniors). 5-year lock-in applies.

Example of Sovereign Gold Bond and Fixed Deposit

Calculating each investment option will help you make the best decisions to achieve your financial objectives. Let's review specific examples to better understand how SGBs and FDs work and how to determine potential returns.

Example of Sovereign Gold Bonds (SGBs)

Particulars Value
Investment Amount ₹5,000
Annual Interest Rate 2.5%

For example, let’s say you invest in SGB and purchase 1 gram of gold at ₹5,000. The annual interest on SGBs is 2.5%.

Calculation of SGB:

  • Yearly Interest Earned = 2.5% of ₹5,000 = ₹125

The interest is paid every six months, so you will receive ₹62.50 every 6 months.

  • Total Interest Paid Out at the End of 8 Years =  ₹125 x 8 = ₹1,000 (This is the total interest you will receive over 8 years).
  • Value at Maturity: After 8 years, you will receive the current value of gold in addition to any interest earned. If gold prices increase to ₹6,000 per gram, the maturity value will be:
    • Value of 1 gram of gold at maturity = ₹6,000
    • Total Interest = ₹1,000

Maturity Value = ₹6,000 + ₹1,000 = ₹7,000

  • Taxation: Interest earned on SGBs is taxable as per your income tax slab. But if you keep the bond until maturity, you will not have to pay capital gains tax on the appreciation of the gold price.

Example of Fixed Deposit (FD)

The formula for calculating fixed deposit interest is:

A = P × (1 + r/n)^(n × t)

Where,

  • A - Maturity amount
  • P - Principal amount
  • r - annual interest rate
  • n - number of times interest is compounded per year
  • t - time period in years

Now, let’s look at how FD works.

Particulars Value
Principal Amount ₹50,000
Fixed Interest Rate 2.5% per annum
Tenure 8 years
Compounding Frequency 12 Months

Calculation of FD:

A = 50,000 × (1 + 0.06/1)^(1×3)

   = 50,000 × (1.06)^3

   = 50,000 × 1.191016

A = ₹59,550.80

Maturity Value (A) = ₹59,551

After 3 years, your ₹50,000 FD will grow to ₹59,551.

  • Taxation: Interest earned on fixed deposits is taxed based on your tax slab under the Income Tax Act. For example, if you are under the 30% tax slab, you will pay tax on the interest earned on your fixed deposit, thus reducing your net earnings.

Benefits of Investing in SGB and FD

SGB and FD are both safe, low-risk investments. While both provide a return against the gold price, one offers fixed interest for certain. Below is a summary table of the main advantages of investing in both:

Benefits SGB FD
Assured Interest Provides a guaranteed interest of 2.50% p.a, over and above capital growth dependent upon the price of gold, and paid half-yearly. Assured fixed interest rates ranging from 6% to 8% p.a., depending on tenure and issuer.
Taxation Capital gains are tax-exempt when the SGB is retained until maturity. However, the interest received on the SGB is taxable. Interest earned from FD is taxable as per your income slab. Tax-saving FD provides ₹1.5 lakh deduction with a lock-in period of 5 years.
Liquidity Tradable on stock exchanges after a lock-in of 5 years. It can also be used as loan collateral. FDs permit early withdrawals at any time (other than tax-saving FDs) at a minor penalty on the interest accrued.
Affordable Investment Tool Investing requires a minimum of 1 gram of gold, a maximum of 4 kg for individuals, 4 kg for HUFS, and 20 kg for trusts and entities. Minimum deposit starts from ₹5.000 (may vary by bank/NBFC). No maximum limit for regular FDs.
Loan Against Investment Can be offered as security for loans from banks, NBFCs, or financial institutions.  You can borrow against fixed deposits as a loan with Banks, NBFCs, and financial institutions, permitting up to 80% of the asset value of your gold or FDs for borrowings. 
Investment Safety SGB is a collateral-backed investment by the Government of India, which is a money-safe and government-insured investment. Secure, with capital protection and guaranteed returns. Regulated by the RBI and insured by deposit insurance up to ₹5 lakh per depositor per bank (under DICGC).

Disadvantages of Investing in SGB and FD

SGBs and FDs may look safe, but each has drawbacks. It’s wise to check their limits around withdrawals, returns, and taxes before locking in your money. Check the table below to compare their disadvantages side by side:

Disadvantages SGB FD
Lock-in Period SGB has an 8-year lock-in period. You can exit after 5 years, but only on interest payout dates.  Tenure is flexible, but breaking before maturity draws a penalty.
Liquidity It is difficult to sell quickly in the market. If gold prices go down, buyers may not pay the full value. You can easily take an early withdrawal; however, banks will have a penalty charge, and interest is disregarded on early withdrawal. 
Market Price Risk The value of SGBs depends on gold market prices. If sold before maturity, the value could drop if gold prices drop.  Market risk is lower. You have fixed returns throughout the entire tenure. Your earnings are fixed, too, since they're not linked to market capitalisation growth.
Tax on Interest Interest is taxable based on the Income Tax Act of 1961. Rather, capital gains periods are not taxed if you stay to maturity. Your interest is taxed based on your income slab, and TDS might also be deducted from it.
Returns Dependence  Returns depend on gold price movements and a fixed 2.5% interest. Returns are fixed and declared at deposit time. No benefit if market interest rates go up.
Availability to Buy Available in limited issue periods announced by the RBI.  - Can’t buy anytime like FDs. Available to invest anytime through banks, NBFCs, and post offices.

SGB vs FD: Which is Better?

Sovereign Gold Bonds (SGB) and fixed deposits (FD) provide safe investments that you can value. Both can be of significant value depending on your investment objectives, risk preference, and liquidity needs.

  • SGBs have an interest rate of 2.5% annually and are government bonds linked to gold. They can also provide an upside if the price of gold increases. SGBs are best for long-term investors who want to invest their money without purchasing gold.
  • Fixed deposits provide you with fixed returns during a fixed time frame without risk. They have early access options, which allow for some flexibility. FDs are good for risk-averse, careful savers who enjoy the safety and constant returns offered.

 

In summary, SGB and FD are two well-known investment options. SGBs allow you to invest in gold without holding physical gold, whereas FDs provide a guaranteed return and flexible tenure. By understanding the features, benefits, and limitations of both investing options, investors can make their decisions based on their own investment requirements and timeframes.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about SGB vs FD

What is SGB?

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SGB stands for Sovereign Gold Bond. The government issues these bonds as an alternative to buying physical gold. You invest in grams of gold, but you don’t get the metal in hand. Instead, you hold a bond and earn fixed interest yearly on your investment.

What is FD?

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FD means Fixed Deposit. You deposit a fixed sum with a bank or financial company for a period. In return, you get a fixed interest rate. After the term ends, you receive your principal plus the interest earned. It’s a popular savings option in India because it’s simple and safe.

Which is riskier: SGB or FD?

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SGB carries a higher risk than an FD. In FDs, your money is safe, and returns are fixed. In SGBs, returns depend on the market price of gold, which can go up or down. Though the government backs SGBs, price risk makes them less stable than FDs.

Which is more liquid: SGB or FD?

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FD is more liquid than SGB. You can break an FD before maturity by paying a small penalty. SGBs have a lock-in period of 5 years for early exit through stock exchanges, and even then, finding a buyer can take time. Full redemption happens only after 8 years.

Which one offers better returns: FD or SGB?

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SGB usually offers better returns if gold prices rise. You get fixed yearly interest (currently 2.5%) plus any profit if gold’s value increases. FDs give fixed returns, and rates rarely beat inflation. So, if you’re ready to take some risks, SGB can give more in the long run.

What is the main difference between SGB and Fixed Deposit?

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The major difference is that SGB allows you to invest in gold without holding physical gold. At the same time, a fixed deposit guarantees interest payments at a fixed rate over a set period.

Is SGB better than FD?

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Yes, SGBs can generate greater returns than FDs if gold increases in value. SGBs have fixed interest, tax benefits when maturity occurs, and accumulate wealth over time. On the other hand, FDs offer predictable returns that are safer than SGBs.

Are SGBS risk-free?

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Yes, SGBs are listed as risk-free instruments in India, as the government backs them. However, returns depend on gold and its market fluctuations.

What is the interest rate offered on Sovereign Gold Bonds?

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SGBs offer an interest rate of 2.5% annually, with interest payable every 6 months.

Can I sell Sovereign Gold Bonds before maturity?

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Yes, selling Sovereign Gold Bonds before maturity is possible, but this can only be done after 5 years. The price of the SGB will depend on the gold market price at the time of sale.

Which is more tax-effective, SGB or FD?

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Compared with FDs, SGBs have a more efficient tax structure. If someone holds SGBs until their maturity period, they do not pay capital gains tax; they only pay tax on the interest income. In an FD, on the other hand, interest earned, regardless of whether reinvested, and early withdrawals are liable to tax.

Is the interest from Fixed Deposits taxable?

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Yes, FD interest is fully taxable. It’s added to your total income and taxed based on your income tax slab. Also, banks deduct TDS at 10% if your interest in a financial year crosses ₹40,000 (₹50,000 for senior citizens).

Can I break a Fixed Deposit before maturity?

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Yes, you can. You can prematurely terminate an FD at any point before maturity. However, banks enforce penalties on interest rates. The amount and terms vary by bank.

What is the lock-in period for Sovereign Gold Bonds?

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SGBs are matured for 8 years, but you may exit within 5 years via stock exchanges on the interest payout dates.

What is the minimum investment for Fixed Deposits?

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In most banks, Fixed Deposits (FDs) have a minimum investment of ₹1,000. Each bank may differ in its limits; however, ₹1,000 is the standard minimum starting investment amount.

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