The main difference between Gold ETFs and Sovereign Gold Bonds (SGBs) is that while Gold ETFs are market-based investments backed by physical gold, SGBs are government securities backed by the Indian government, offering a sovereign guarantee.
What are Gold Sovereign Bonds?
Sovereign gold bonds are a secure investment option mandated by the RBI, allowing individuals to invest in gold without holding it physically. These bonds are less affected by market fluctuations, making them popular, with gold’s price often rising significantly over time.
What Is Gold ETF?
Gold ETF is a mutual fund specializing in gold-based assets, functioning like individual stocks and traded on stock exchanges. This commodity-based fund offers an investment alternative, mirroring the performance of gold while providing liquidity and ease of stock trading.
Gold ETF Vs. Sovereign Gold Bond
The main difference between Sovereign Gold Bonds and Gold ETFs is that SGBs offer an additional interest rate, making them suitable for long-term investors seeking both capital appreciation and periodic income, Gold ETFs are purely linked to gold prices and do not provide any interest.
Liquidity and Redemption Options
Gold ETFs are readily tradable on the stock exchange, offering liquidity and ease of entry and exit. Sovereign Gold Bonds are also tradable on stock exchanges but can only be redeemed after the 5th year of holding.
Cost Structure
Gold ETFs may have management fees and brokerage costs associated with buying and selling. Due to fixed interest rates, SGBs do not have management fees but may offer lower returns.
Returns
Gold ETFs typically offer returns that closely mirror the actual performance of gold. However, Sovereign Gold Bonds (SGBs) tend to offer higher returns than the actual gold market, mainly due to the additional interest component they provide.
Taxation
Profits from the sale of Gold ETFs are subject to capital gains tax, while the interest income from SGBs is exempt from capital gains tax if held till maturity. Additionally, SGBs have tax benefits for long-term investors.
Storage
Both Gold ETFs and Sovereign Gold Bonds involve minimal storage costs. Gold ETFs require storage for the physical gold they represent, usually handled by the fund house, while SGBs, being digital or paper securities, have negligible storage concerns.
Government Backing
SGBs are backed by the Indian government, providing a sovereign guarantee, while Gold ETFs are not government-backed.
Liquidity vs. Interest
Gold ETFs prioritize liquidity and ease of trading, while SGBs focus on providing interest income along with potential gold price appreciation, making them suitable for different investment objectives.
Sovereign Gold Bond Vs Gold ETF – Quick Summary
- The distinction between Sovereign Gold Bonds (SGBs) and Gold ETFs lies in SGBs are government-issued with fixed tenure, offering interest and capital gains, while Gold ETFs provide liquidity and track gold prices, allowing flexible buying/selling.
- Sovereign Gold Bonds are government-issued, interest-bearing bonds that provide a secure way to invest in gold without needing physical storage.
- Gold ETFs are ideal for shorter or medium-term investments, providing versatility. On the other hand, SGBs cater to long-term investors seeking both interest earnings and potential gold price growth.
- Capital gains tax applies to profits from Gold ETF sales, but interest income from SGBs is tax-exempt if held until maturity, and SGBs offer tax advantages for long-term investors.
- You can explore SGBs on our Alice Blue Rise page, and SGBs can also be purchased from stock brokers through your demat account.
Gold ETFVs Sovereign Gold Bond – FAQs
What is the difference between Sovereign Gold Bond (SGB) and Gold ETF?
The difference between Sovereign Gold Bonds (SGBs) and Gold ETFs is that SGBs, issued by the government, offer interest and capital gains with a fixed tenure, while Gold ETFs track gold prices, provide liquidity, and can be bought/sold anytime.
Is gold ETF taxable?
Yes, gold ETFs are subject to taxation. Short-term capital gains (held for less than 3 years) are taxed as per your income tax slab. Long-term capital gains (held for 3 years or more) are taxed at 20% with indexation benefits.
Is SGB taxable after 5 years?
If investors pull out their investment from gold bonds after 5 years, it’s taxable. Selling before maturity subjects earnings to capital gains tax.
Does gold ETF pay dividends?
Gold ETFs do not pay dividends. Instead, they aim to replicate the price of physical gold, and any gains come from changes in the gold price when you sell the ETF units.
