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Sovereign Gold Bond vs Physical Gold- Which should you buy?

Written by - Rudri Rawell

December 5, 2022 5 minutes

Gold, an asset that enjoys investment and sentimental value for most Indians, has always been in demand irrespective of the economic phase. People consider gold to be an important element in their investment portfolio that acts as a hedge against inflation and can be passed on to the next generation as wealth. 

Today, gold investment can be made in many forms, from purchasing physical gold jewellery or coins to digital gold and even avenues like Sovereign Gold Bonds and Gold ETFs. Each of these forms comes with unique features and characteristics. 

Here, we will talk about sovereign gold bonds and physical gold while trying to understand how they differ from one another in terms of benefits and drawbacks. 

Which is better – sovereign gold bond or physical gold?

SGBs or Sovereign gold bonds were introduced in 2015 by the Indian government. Issued by the RBI, these government securities have gold as the underlying asset. These bonds are ideal substitutes for holding physical gold. While buying SGBs, investors pay the issue price and redeem the bonds at maturity. Both these transactions take place through cash exchange. At maturity, apart from interest income, investors also get to redeem the bonds at the ongoing market price. 

Let’s take a look at some of the factors that help in differentiating SGBs from physical gold:

  1. Investment preference: According to investment experts, Indians continue to prefer investing in physical gold due to the sentimental value attached to it. SGBs, on the other hand, is still considered new and since it involves virtual gold investment, not many people prefer this format. SGBs, however, are safe investment options since these are backed by a bank and they earn a simple interest of 2.5%. This interest is paid bi-annually and is taxable. 
  1. Storage cost: Physical gold is mostly kept in bank lockers which attracts annual storage costs. However, in SGB investment, there is no storage cost involved, thus making it an economical investment alternative. Also, unlike physical gold such as jewellery, there are no making charges involved in SGBs. 
  1. Purity: Oftentimes, while buying physical gold, people are cheated with low-purity products, especially if the gold units do not have a hallmark certification. With SGBs, investors do not have to worry about purity.
  1. Demat account: While investing in SGBs, it makes sense to have a Demat account so that the returns can be easily credited directly into the Demat account. As per the investment made by the investor, gold units get allotted and these get credited into the investor’s Demat account. In the absence of a Demat account, the investor can also seek for the bonds to be issued in physical or e-certificate form. In the case of physical gold, there is no requirement for a Demat account.
  1. Tax: Interest earnings on SGBs are taxable as per the Income tax slab applicable to the investor. If, however, an investor sells the SGB after it reaches maturity at the end of 8 years, the entire capital gains are tax-exempt. Thus, in the long run, SGBs may offer better tax-efficient returns as compared to physical gold.
  1. Liquidity: With Sovereign Gold Bonds, investors have to be willing to deal with lower liquidity as compared to physical gold, Physical gold can be sold anywhere and at any time against cash, thus making it a more liquid investment. With a lock-in period of 5 years in SGBs and a maturity of eight years, investors have to wait longer to get back their capital. 


Gold has been the go-to investment for Indians for ages. Until a decade ago, people mostly preferred buying physical gold. As times change, so does the format of gold investment. People are seeing gold beyond jewellery, gold biscuits, etc as various other formats such as digital gold, SGBs, and even gold mutual funds are being introduced that allow one to hold gold in dematerialized format.

Having gold in an investment portfolio is essential as it allows better portfolio diversification and provides financial protection during economic uncertainties.


Is it a good time to buy a Sovereign Gold Bond?

Sovereign Gold Bonds are ideal for investors who have a long-term investment horizon. Since gold prices are seen to be on a falling trend recently, it can be the right time to invest in SGBs as one can earn better long-term returns.

How many times SGB comes in a year?

SGBs are issued in tranches and in 2021 there were total of 10 tranches issued.

Is bank FD better than SGB?

Bank FDs are known as the safest and risk-free interest-earning avenues. Since SGBs come with the underlying of gold, these can be used as a long-term hedge against inflation.

Who is eligible to invest in the SGB?

Any Indian citizen who is an individual, HUF, trust, university or charitable institution can invest in Sovereign Gold Bonds.

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