Most investors focus only on gold price movement. However, the way you invest in gold significantly impacts taxation, liquidity, and long-term returns. Sovereign Gold Bonds (SGBs), Gold ETFs, and physical gold behave differently despite tracking the same underlying commodity.
The difference becomes visible only after factoring tax rules, holding period, storage costs, and liquidity flexibility. Ignoring these variables can reduce effective returns by several percentage points.
Choosing the right vehicle matters as much as choosing the right asset.
Basic Structure Comparison
Here is how the three gold investment options differ structurally:
| Feature | SGB | Gold ETF | Physical Gold |
|---|---|---|---|
| Form | Government bond | Exchange-traded fund | Jewellery/Coins/Bars |
| Storage Risk | None | None | Yes |
| Annual Interest | ~2.5% (fixed) | No | No |
| Liquidity | Moderate | High | High |
| Tenure | 8 years (maturity) | Open-ended | No lock-in |
SGB stands out because it offers additional interest income on top of gold price appreciation.
Taxation Comparison (Critical Difference)
Tax rules vary significantly:
| Investment Type | Holding Period for Long-Term | Capital Gains Tax | Indexation Benefit |
|---|---|---|---|
| SGB (Held till maturity) | 8 years | Capital gains exempt | Not needed |
| SGB (Sold before maturity) | 3 years | LTCG applicable | Yes |
| Gold ETF | 3 years | LTCG applicable | Yes |
| Physical Gold | 3 years | LTCG applicable | Yes |
If SGB is held until maturity and redeemed with the issuer, capital gains are tax-free for individuals. This gives SGB a major advantage.
Return Comparison Example (10-Year Scenario)
Assume:
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Gold grows at 8% annually
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Investment amount: ₹5,00,000
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Holding period: 10 years
Projected values:
| Instrument | Gold Growth Value | Additional Interest | Approx Total Value |
|---|---|---|---|
| Physical Gold | ~₹10.8 lakh | None | ~₹10.8 lakh |
| Gold ETF | ~₹10.8 lakh | None | ~₹10.8 lakh |
| SGB | ~₹10.8 lakh | ~₹1.25 lakh (2.5% annually before tax) | ~₹12 lakh+ |
Additionally, if redeemed at maturity, capital gains on SGB are exempt. That further improves effective post-tax return.
Liquidity Considerations
Gold ETF trades on stock exchange like equity shares. Liquidity is usually high during market hours, making entry and exit flexible.
Physical gold is liquid but may involve:
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Making charges
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Buyback deductions
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Purity verification
SGB trades on exchange too, but volumes may be lower than ETFs. Exit before maturity may require selling at discount or premium depending on demand.
Cost Structure Comparison
| Cost Type | SGB | Gold ETF | Physical Gold |
|---|---|---|---|
| Expense Ratio | No | 0.5–1% annually | No |
| Making Charges | No | No | 5–20% (jewellery) |
| Storage Cost | No | No | Locker cost |
| Brokerage | Minimal | Yes | Minimal |
Over long duration, ETF expense ratio slightly reduces returns.
When SGB Makes Most Sense
SGB is ideal when:
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Investment horizon ≥ 8 years
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You do not need frequent liquidity
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You want tax-free capital gains
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You want additional fixed interest income
Long-term investors benefit the most.
When Gold ETF Is Better
Gold ETF suits investors who:
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Want high liquidity
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May trade or rebalance frequently
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Prefer demat convenience
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Do not want 8-year lock-in
It is flexible but does not offer additional interest.
When Physical Gold Is Practical
Physical gold may be suitable for:
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Cultural or jewellery needs
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Short-term possession purposes
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Non-investment reasons
As a pure investment vehicle, it is generally less efficient due to making charges and storage costs.
Inflation and Real Return Perspective
Gold historically acts as inflation hedge. However, long-term equity markets often outperform gold in real returns. Gold should typically form 5–15% of diversified portfolio, not majority allocation.
Example allocation:
| Portfolio Type | Suggested Gold Allocation |
|---|---|
| Aggressive | 5–10% |
| Moderate | 10–15% |
| Conservative | 15% max |
Overexposure may reduce overall portfolio growth.
Conclusion
SGB offers the most tax-efficient route if held till maturity, thanks to capital gains exemption and additional 2.5% interest. Gold ETF provides higher liquidity and trading flexibility but carries expense ratio. Physical gold is practical for consumption needs but less efficient as investment.
The right choice depends on holding period and liquidity preference. For long-term investors seeking tax advantage, SGB usually wins after tax. For flexibility and quick exit, ETF is better.
FAQs
Is SGB better than Gold ETF?
If held till maturity, SGB usually delivers better post-tax return due to capital gains exemption and fixed interest.
Can I sell SGB before 8 years?
Yes, on exchange after lock-in period, but market price may differ from gold price.
Is physical gold a good investment?
It serves consumption needs but is less efficient due to making charges and storage costs.
How much gold should I hold in portfolio?
Typically between 5% and 15% depending on risk profile and diversification needs.