Difference Between Sovereign Gold Bond (SGB) vs Physical Gold

difference between sovereign gold bond and physical gold

Gold buyers today have more than one way to invest. Physical gold stays popular, but people are turning their eyes more to Sovereign Gold Bonds (SGBs) for better value and safety. Physical gold is the traditional way of buying gold in the form of coins, bars, or jewellery. On the other hand, SGB is a government bond whose value is linked to the market price of gold.

Both SGBs and physical gold have their own benefits, but differ in benefits, drawbacks, and taxation. Knowing these differences can help you pick the right option. In this guide, we will break down the key differences between SGB vs gold so you can make wise decisions.

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What is a Sovereign Gold Bond?

A Sovereign Gold Bond (SGB) is an investment where you buy gold in paper form, not as jewellery or coins. The Government of India issues these bonds through the Reserve Bank of India. You earn a fixed interest of 2.5% per year, which is paid twice a year. The bond has a maturity period of 8 years, but you can exit after 5 years on the interest payout dates.

There are set limits for how much you can invest in these bonds. The minimum investment is equal to 1 gram of gold. The maximum limit in a financial year is 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs), and 20 kg for trusts and other eligible organisations.

What is Physical Gold?

Physical gold is the traditional way people buy gold in the form of jewellery, coins, or bars. It’s a real, tangible asset that you can touch, hold, and store safely at home, in a bank locker, or a private vault—the value of physical gold changes with the market price of gold.

Based on the current rate, you can sell it anytime at a jeweller or gold dealer. Many prefer physical gold for personal use, gifts, or long-term investment. However, it comes with extra costs like making charges on jewellery, storage worries, and the risk of theft.

Difference Between Sovereign Gold Bond and Physical Gold

When it comes to investing in gold, people often get confused between Sovereign Gold Bonds (SGBs) and physical gold. Both options offer value, but they work very differently. To help you pick the right one for your needs, here is a clear and simple comparison between the two:

Parameters Sovereign Gold Bonds (SGBs) Physical Gold
Definition A government-issued bond where the value is linked to the price of gold. You earn yearly interest and get the market value on maturity. Real gold is bought as jewellery, coins, or bars, which you can store and sell physically.
Form Digital or paper-based investment. You won’t get real gold, but its value is in a bond form. You can touch real gold and buy it as jewellery, coins, or bars.
Issuer Issued by the Government of India through the Reserve Bank of India (RBI). Sold by jewellers, banks, private dealers, and online gold sellers.
Lock-in Period 8 years, with an option to exit after 5 years on interest payout dates. No lock-in. You can sell it anytime based on the current gold rate.
Price Based on the average market price of 24K gold, decided by the RBI before every bond issue. Based on daily market rates, plus extra charges like making fees for jewellery.
Return on Investment Gold price appreciation + fixed interest of 2.5% per year, paid twice a year till maturity. Value grows or drops with the market price of gold—no extra interest earned.
Safety No risk of theft or storage hassles as it’s held in Demat or certificate form. It needs personal storage at home, in a locker, or in a bank. There is a risk of theft or damage.
Tax Benefits No capital gains tax if you hold them till maturity. Interest is taxable as per your income slab. Indexation benefits apply if held for the long term. Capital gains tax applies to profits made when selling. No tax benefits on holding.
Demat Account You need a demat account to buy and hold SGBs. Not needed. You store it physically at home, in a locker, or a bank safe.
Liquidity Tradable on stock exchanges after 5 years, before maturity. It can also be transferred to others. Can be sold anytime to jewellers, gold dealers, or pawn shops for instant cash based on the market rate.
Minimum Investment Starts from 1 gram of gold, making it easy for small investors to start. No fixed minimum. You can buy the smallest coin or light jewellery within your budget.
Additional Costs No extra charges apart from the purchase price. No making or storage fees are involved. Includes making charges (for jewellery), locker fees, and possible appraisal charges.
Purity Concerns No purity issue, as returns are linked to standard 24K gold rates declared by the RBI. The purity of what you buy depends on what you buy (22K, 24K). You must check the hallmark and weight while buying.
Usage Only for investment purposes. Can’t use it physically, but earns returns on the gold’s market value. It can be worn, gifted, or passed down as family wealth, as well as serving as an investment.

Pros of Investing in SGB and Physical Gold

Whether you pick Sovereign Gold Bonds (SGBs) or physical gold, both offer their own benefits. Here is a simple table showing their key advantages:

Benefit Sovereign Gold Bonds (SGBS) Physical Gold
Extra Earnings Offers 2.5% fixed annual interest over and above gold price appreciation, paid twice a year. No additional earnings. Returns depend only on market gold price movements.
High Safety No risk of theft, loss, or damage. Held digitally in a Demat account or as a paper certificate. Risk of theft or misplacement. Needs proper storage, like lockers or home safes.
Tax Advantage No capital gains tax if held for 8 years. Interest is taxable, but capital gains are exempted. Gains are taxed as per capital gains rules when sold—no tax benefits on holding or purchasing.
No Purity Worries Returns linked to RBI-declared 24K gold rates. No purity concerns. Purity varies by type (22K, 24K). Before buying, you must check the hallmark and certification.
Affordable Entry Point Start investing with as little as 1 gram of gold, making it accessible for all income groups. No fixed minimum, but the smallest coins or jewellery usually start from higher amounts.
Ease of Buying & Selling Available through banks, post offices, and online platforms. Can be traded on stock exchanges. Can be purchased from jewellers or banks. Easy to sell anytime to local jewellers or dealers.
Making Charges No making charges are involved in buying or holding bonds. Jewellery carries making charges (3–25%), which don’t add to investment value.

Cons of Investing in SGB and Physical Gold

Every investment comes with its drawbacks, including gold. Here is a clear, easy-to-understand table comparing their key limitations:

Cons Sovereign Gold Bonds (SGBs) Physical Gold
Lock-in Period It has an 8-year maturity. Early exit is possible after 5 years on the stock exchange, but with conditions. Can be sold anytime to jewellers, dealers, or pawn shops without restrictions.
Interest Taxable The 2.5% annual interest is taxable as per your income slab. No additional earnings, so there is no tax on extra returns.
Limited Liquidity Can only be traded on exchanges after 5 years or transferred to others before maturity. Highly liquid. You can sell anytime at market rates based on weight and purity.
Dependent on the RBI Issue Available for purchase only during specific RBI subscription windows. It can be bought anytime from jewellers, banks, or dealers.
Storage and Safety Costs You don’t need a physical locker to store these bonds.  You need lockers, safes, or insurance, which adds extra cost and responsibility.
Purity Concerns There are no purity issues. Returns connected to standard 24K gold rates. Buying impure or underweight gold is risky if not checked properly.

Comparing Taxation on Sovereign Gold Bond and Physical Gold

Since tax rules for both differ, it is important to understand how these differences affect your returns. Below is a table that compares the taxation on the two:

Aspect Sovereign Gold Bonds (SGBs) Physical Gold
Annual Interest 2.5% interest, added to income and taxed as per your slab. No interest earned.
Holding Period – Up to 3 Years Gains are added to gross income and taxed as per the slab. Gains are taxed as per the income slab (short-term capital gains).
Holding Period – 3 to 8 Years 20% tax on gains with indexation if sold before 8 years. 20% tax on gains with indexation (long-term capital gains).
Holding Period – 8 Years No tax on capital gains after full 8-year maturity. Not applicable.
Tax on Sale Depends on the holding period; interest is always taxable. Taxed only on sales based on the holding period.

SGB or Physical Gold: Which is Better?

Your choice between SGBs and physical gold depends on your goal, risk comfort, and whether you want to use it or grow your money.

  • Sovereign Gold Bonds (SGBs) appeal to investors looking for a long-term gold investment. These are best for those looking for fixed returns, a safe investment, no storage issues, and tax benefits.
  • Physical gold investments are made for those who value being able to own, wear, or gift a gold product. It can be sold at any time of the year. However, you'll have to pay making charges. Always verify the purity to avoid safety issues.

 

Gold remains a true asset for Indian investors. While some investors prefer the new options SGB offers, others prefer physical gold. It is essential to know about all options available to investors. Each option has its pros, cons, risks, and returns on investment. Therefore, what's most important is identifying the option suitable for your plan and your future financial goals.

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 Physical Gold

What is a Sovereign Gold Bond (SGB)?

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An SGB is an electronic bond tied to the value of gold. It earns interest and is a safe method of investing in gold without physically possessing it.

Is it possible to convert SGB into physical gold?

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No, you can’t convert SGB into physical gold. SGB is a paper or digital investment linked to the price of gold, not actual gold you can hold. If you want physical gold, you would need to sell your SGBs and buy gold in the form of coins, bars, or jewellery separately.

Where should I invest: SGB or Physical gold?

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It depends on your choices. SGB is safer, offers interest, and has no storage worries. Physical gold, however, offers tangible value and flexibility to sell anytime. If you want long-term investment and safety, SGB is a good choice.

What are the minimum and maximum limits in SGB?

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The minimum investment in SGB is 1 gram of gold. The maximum limit is 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs), and 20 kg for trusts in a financial year.

Can I redeem my SGB before 5 years?

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Yes, you can redeem your SGB before 5 years, but only on interest payout dates. After 5 years, you can redeem at any time.

Does SGB have a lock-in period?

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Yes, SGB has a lock-in period of 8 years. However, you can exit after 5 years on the interest payout dates.

What is Physical Gold?

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Physical gold consists of coins, bars, and jewellery you can touch, keep at home, and use, usually stored for cultural, personal, or investment reasons.

What is the key difference between SGB and physical gold?

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The major difference between Sovereign Gold Bonds (SGBs) and physical gold is that one is a form of ownership, and the other is a form of physical asset a person can hold. The SGBs are paper assets representing a specific weight of gold, while physical gold is an actual gold commodity that can be traded and stored physically.

Which is safer: SGB or physical gold?

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SGB is safer because it is paper-issued by the RBI and safely stored digitally, with no chance of theft or loss. Physical gold requires safe custody and involves potential insurance.

Can I use SGB like jewellery?

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No, SGBs are financial investments only and cannot be worn or passed on like physical gold.

Do SGBs offer any interest income?

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Yes, SGBs yield 2.5% interest per annum, paid every six months, in addition to the returns on the gold price.

Is there a tax benefit in SGBs?

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Yes. If held to maturity (8 years), capital gains on SGBs are exempt from tax. Interest income is taxable, however.

Is physical gold taxed when sold?

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Yes, capital gains tax is imposed depending on how long you hold it. Long-term gains are taxed at 20% with indexation.

How is SGB different from physical gold?

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SGB is a paper or electronically-held investment with interest yields and without the requirement for storage. Physical gold is physical but non-interest-earning and comes with the cost of storage or security issues.

Which is more liquid: SGB or physical gold?

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Physical gold is more liquid and can be easily pawned or sold. SGBs are tradeable but not as readily available.

Can I get a loan against SGB or physical gold?

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Yes, both can be utilised as collateral, although gold loans against physical gold are more prevalent and easily accessible.

Which one is better for long-term investment: SGB or physical gold?

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SGB is generally preferable for long-term investors because of additional interest income, tax advantage, and lack of storage trouble.

Can I have SGB and physical gold in my portfolio?

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Yes, having both provides long-term financial growth with SGB and flexibility, which is traditionally used in conjunction with physical gold.

What is the minimum investment in SGBs?

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The minimum investment is 1 gram of gold. It's a good choice for small investors who wish to invest in gold digitally.

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