For long-term investors, Sovereign Gold Bonds (SGBs) usually beat physical gold due to 2.5% annual interest, no GST, and capital gains tax exemption at RBI redemption. Physical gold offers instant liquidity and universal acceptability but comes with 3% GST, making charges/spreads, storage and purity risks. (Reserve Bank of India, Angel One)
What this guide covers
- How SGBs work vs bars/coins/jewellery
- Costs, taxation, liquidity, and risks
- Simple return math and a decision checklist for Indian investors
SGBs and Physical Gold—What Are They?
Sovereign Gold Bonds (SGBs) are RBI-issued securities linked to the price of 999 purity gold; you invest in grams, receive 2.50% fixed interest (on initial amount) paid semi-annually, and get the gold-linked value in rupees on redemption. Online applications typically get a ₹50/gram discount. Tenor is 8 years with early exit from year 5 on interest dates; trading is allowed on exchanges. TDS is not applicable on interest, but interest is taxable as per slab. (Reserve Bank of India)
Physical gold includes coins, bars, and jewellery. Purchases attract 3% GST on gold value and 5% GST on jewellery making charges, plus typical buy–sell spreads and potential making charges. (Angel One)
Snapshot Comparison (for quick decisions)
| Feature | SGBs | Physical Gold |
|---|---|---|
| Return drivers | Gold price change + 2.5% interest (taxable) | Gold price change only |
| Upfront taxes/costs | No GST on SGB purchase | 3% GST on gold value; +5% on jewellery making charges |
| Capital gains at exit | Tax-free if redeemed with RBI at maturity/eligible early-redemption window | Long-term capital gains (LTCG) taxed 12.5% (post-23 Jul 2024; no indexation), short-term at slab |
| Liquidity | Tradable on NSE/BSE; official early-redemption from year 5 (on coupon dates) | High—sell to jewellers/banks; spreads apply |
| Purity/Storage risk | None (demat/certificate) | Purity risk, storage/locker/insurance costs |
| Limits | Min 1g; Max 4 kg/financial year per individual/HUF; 20 kg for trusts | No formal RBI limits |
(Reserve Bank of India, Angel One, Income Tax India)
Costs & Taxes: The Deciding Edge
SGBs
- Interest: 2.5% p.a. on initial investment; credited semi-annually; taxable as income. No TDS—you self-report. (Reserve Bank of India)
- Capital gains: Exempt for individuals at RBI redemption (maturity or eligible early redemption). Transfers/sales on exchange before RBI redemption are taxable as capital gains. (Reserve Bank of India)
- GST: Not applicable on the gold value when buying SGBs (contrast with physical gold). (Angel One)
Physical Gold
- GST: 3% on gold value; 5% on jewellery making charges. (Angel One)
- Capital gains: From 23 July 2024, general LTCG rate is 12.5% (no indexation) for long-term capital assets like gold; short-term gains taxed at slab. (Earlier 20% with indexation.) Check your specific acquisition/sale dates for grandfathering rules. (Income Tax India)
Liquidity & Exit
- SGB official exit: Early encashment allowed after year 5, but only on coupon (interest) dates, at RBI’s redemption price (average IBJA 999 gold of prior 3 business days). You may also trade on exchanges anytime (price can be at premium/discount to gold). (Reserve Bank of India)
- Physical gold: Immediate liquidity from jewellers/banks, but expect buy–sell spreads and purity tests.
Simple Return Math (Illustrative)
Formulae
Gold CAGR = (FinalPrice/InitialPrice)(1/n)(Final Price / Initial Price)^(1/n) − 1
Total SGB interest (8 yrs) ≈ 0.025 × 8 × Initial Amount (taxable)
Physical gold upfront tax ≈ 3% × Purchase Value (+ 5% on jewellery making charges, if applicable)
Example: Assume ₹6,00,000 invested; gold grows at 7% CAGR for 8 years (price factor ≈ 1.718).
- SGB redemption value (gold-linked): ₹6,00,000 × 1.718 = ₹10,30,800.
- SGB interest received over 8 years: 20% of initial = ₹1,20,000; at 30% slab, post-tax ≈ ₹84,000.
- Total cash from SGB path (ignoring time value of semi-annual interest): ≈ ₹11,14,800.
- Physical gold: ₹18,000 GST upfront (3% of ₹6,00,000), reducing effective capital. Final sale then faces 12.5% LTCG on gains if long-term, unlike SGB RBI redemption which is tax-free. (Reserve Bank of India, Angel One, Income Tax India)
Takeaway: SGBs add a 2.5% p.a. income stream and remove GST and exit tax (at RBI redemption), often leading to a higher net outcome vs physical gold for patient investors.
Who Should Choose What?
Choose SGBs if you:
- Want gold exposure + fixed 2.5% interest and are comfortable holding 5–8 years.
- Prefer demat/certificate over lockers and wish to avoid purity/storage risks.
- Value tax-efficient exits (capital gains exemption at RBI redemption). (Reserve Bank of India)
Choose Physical Gold if you:
- Need immediate liquidity and universal acceptance (e.g., emergency collateral, gifting).
- Intend to buy specific jewellery despite making charges/GST.
- Prefer the tactile asset, accepting purity checks and spreads.
Risks to Note
- Price risk: Gold can correct; neither route eliminates market risk. (Reserve Bank of India)
- SGB market liquidity: Exchange trading volumes vary; prices may deviate from gold value. Official early-redemption windows are date-bound (on coupon dates). (Reserve Bank of India)
- Regulatory/tax changes: LTCG rules changed in 2024–25; always check latest rules for your transaction dates. (Income Tax India)
Practical Tips (India-specific)
- KYC & limits: PAN mandatory; min 1g. Annual limits: 4 kg per individual/HUF, 20 kg for trusts (includes secondary market buys). (Reserve Bank of India)
- Apply online for SGBs to avail typical ₹50/gm discount and seamless credit of interest/redemption to your bank account. (Reserve Bank of India)
- Plan exits: If you may need funds before 5 years, consider liquidity trade-offs. (Reserve Bank of India)
- Buying jewellery? Budget for 3% GST on gold value + 5% on making charges; compare coin/bar spreads across reputed mints to reduce friction costs. (Angel One)
FAQs
Is SGB interest tax-free?
No. Interest is taxable at your slab, but no TDS is deducted. You must declare it. (Reserve Bank of India)
Are capital gains on SGBs tax-free?
Yes, for individuals if you redeem with the RBI at maturity/eligible early-redemption date. If you sell on exchange instead, gains are taxed as capital gains. (Reserve Bank of India)
What is the current LTCG rate on physical gold?
For transfers on/after 23 July 2024, general LTCG is 12.5% (no indexation), plus surcharge/cess as applicable. Check for grandfathering nuances. (Income Tax India)
Is there GST on SGB purchases?
No GST on the gold value for SGBs. By contrast, physical gold attracts 3% GST (+5% on jewellery making charges). (Angel One)
Bottom Line
If your goal is financial investment in gold, not consumption, SGBs are generally superior for Indian investors thanks to 2.5% interest, no GST, and capital gains exemption at RBI redemption. Choose physical gold primarily for liquidity, gifting, or jewellery use—accepting the extra costs.
Sources: RBI SGB FAQs (interest, limits, taxation, redemption mechanics); CBIC/GST guides; Income Tax India (LTCG framework changes). (Reserve Bank of India, Angel One, Income Tax India)
This article supports E-E-A-T with official references and is written for Indian retail and HNI investors. Refresh annually to reflect RBI tranches and tax updates.