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Sovereign Gold Bonds (SGBs) and Gold ETFs are popular and safer alternatives to physical gold. Investing in such financial instruments also helps investors to broaden their financial portfolio. While both track the current gold prices and are traded in stock exchanges, they differ in returns, investment, liquidity, collateral and taxation. Understanding the difference between the sovereign gold bond and gold ETFs can help investors to make an optimal decision that fits their financial objectives and portfolio diversification.
What is a Sovereign Gold Bond
Sovereign Gold Bonds are government securities issued by the RBI under the Gold Monetisation Scheme. It acts as a digital gold substitute to physical gold with a 2.50% annual fixed interest rate. The value of the sovereign gold bond moves in accordance with the gold price movement. The interest is credited semi-annually to the investor’s bank account. These bonds are traded in stock exchanges. However, new issuances of SGBs have been discontinued by the government. No new tranches for the 2025-26 fiscal year were issued or announced due to high borrowing costs.
Features of SGBs
- The minimum investment in the bond is 1 gram of gold. The maximum investment is limited to 4 kg of gold for individuals and HUFs and 20 kg of gold for trusts, universities and charitable institutions.
- The tenure of SGBs is 8 years, with an exit option after the 5th year from the date of issue on coupon payment dates.
- The capital value of the bond fluctuates based on the average closing price of 999 purity gold over the last 3 business days, as per the India Bullion and Jewellers Association Ltd (IBJA).
- The interest earned on sovereign gold bonds is taxable as per the investor’s tax slab.
- The income tax exemption on capital gains of SGBs, effective 1 April 2026, at maturity is limited to the original investor. The secondary market bond investors will be taxed on capital gains.
What is a Gold ETF
A Gold ETF (Exchange-Traded Fund) is a SEBI regulated passive investment instrument that invests in standard gold bullion. They are issued by mutual fund houses. The units are traded on stock exchanges, allowing investors to buy gold digitally without theft or storage risks. Each unit of gold ETF represents one gram of physical gold with 99.5% purity. The value of the unit depends on the market price of the gold.
Features of Gold ETFs
- Gold ETFs blend the flexibility of stock investments with the simplicity of gold investments.
- Investors can buy and sell units on NSE/BSE using a demat trading account.
- On liquidation, investors get the value based on the prevailing domestic gold market price. There are no such interest payments.
- These ETFs are subject to capital gain taxation. The units held within 12 months are taxed at the investor’s tax slab (short term capital gains) and for more than 12 months are taxed at 12.5%, without indexation (long term capital gains).
Sovereign Gold Bond (SGBs) vs Gold ETF
| Distinction | SGBs | Gold ETFs |
| Minimum Investment | Price of 1 gram | Price of 1 unit (~1 gram) |
| Maximum Investment | 4 kg in a financial year | No such limit |
| Backed by | Government of India | Asset Management Companies (AMCs) |
| Liquidity | Less liquid due to a 5 year lock-in for early redemption | Highly liquid as units are traded in stock exchanges |
| Returns | Capital appreciation + 2.5% p.a. fixed interest payment semi-annually | Capital appreciation |
| Availbility | Only when the government announces new tranches | Available anytime through stock exchanges |
| Capital Gain Taxation | Exempt from tax if held till maturity, i.e., 8 years | Taxable based on holding period |
| Fees | No expense ratios | Expense ratios, brokerage and transaction costs |
| Collateral | Can be pledged as collateral for availing loans from banks and NBFCs | Cannot be used as collateral for availing loans |
Wrapping Up
SGBs are well-suited for long term and risk-averse investors seeking interest payments and tax efficiency. These bonds also offer higher capital protection as issued by the RBI, making them suitable for retirees and senior citizens.
Gold ETFs are better for short term investors seeking flexibility to enter or exit positions and need quick liquidity. Further, there is no maximum limit allowing investors to buy gold units as much as they want for higher returns.
Eventually, investors need to make an optimum decision on the gold ETF vs sovereign gold bond based on their financial goals, risk appetite, investment horizon and implications of tax on bonds and gold ETFs.