Sovereign Gold Bond vs Digital Gold: Key Differences
Gold investment has always held a special place in the heart of Indians. Gold is viewed not only as a metal used for adornment but also as an investment. Besides investing in physical gold, nowadays, you can also invest in gold digitally.
If you are confused between Sovereign Gold Bonds and Digital Gold, read on to learn more about both. This article will walk you through the key differences between Sovereign Gold Bonds and digital gold.
What is a Sovereign Gold Bond?
The Reserve Bank of India issues gold bonds on behalf of the government. Unlike many others, these bonds come into the public market in small tranches, facilitating the investors to purchase small quantities. The Government of India launched the Sovereign Gold Bond scheme in 2015.
Under this scheme, gold is sold on a per-unit basis, and the value of each unit of gold is calculated in accordance with 999 purity. The cost price and redemption price are estimated by calculating an average of closing prices of gold for the last three working days preceding the subscription period.
These bonds are an excellent substitute for physical gold, which you need to safeguard. In contrast, sovereign gold bonds are available in paper/digitised format.
The key features of Sovereign Gold Bonds are:
- You can invest in as low as 1 gram of gold.
- Maximum subscription limit for Sovereign Gold Bonds is 4 kg for individuals and Hindu Undivided Families (HUFs) and 20Kg for trusts and other entities.
- The buying and redemption prices of Sovereign Gold Bonds are directly linked to the market price of gold.
- The SGBs have a maturity tenure of 8 years, but you can premature them after 5 years with RBI and can also trade in secondary market.
- You can buy sovereign gold bonds via a bank and Demat account or from agents associated with post offices, nationalised banks, licensed stock exchanges, etc.
Pros of Sovereign Gold Bond investment
- Sovereign gold bonds are available in paper and Demat format. Hence it saves the storage cost for physical gold. SGB is a good option if you only want to buy gold for investment purposes.
- The biggest advantage of investing in Sovereign Gold Bonds is that they offer a 2.5% interest per annum on the issuance price of SGB. This is over and above the returns that you get due to gold price appreciation.
- Any capital gains on Sovereign Gold Bonds at redemption with RBI are entirely tax-free.
Cons of Sovereign Gold Bond investment
- The long maturity period of 8 years often discourages potential investors however pre-mature window opens after 5 years and investor can also trade in secondary market.
- Investment in SGB can result in a capital loss as the bond value depends on the prices in the international markets, which are subject to fluctuations.
What is Digital Gold?
Digital gold, as the name suggests, is gold available in a digital format. While buying digital gold, you pay the money for the gold and get a certificate showing the amount of gold you have purchased. Once the certificate is issued, an equivalent amount of physical gold is bought on your behalf and stored in a secured vault.
The features of digital gold are:
- You can digitally purchase 24K gold for as little as Rs.1, making digital gold affordable to most income groups.
- Unlike physical gold, digital gold has no making or safekeeping charges.
- In India, digital gold is primarily sold by three entities – MMTC PAMP, Augmont Goldtech and Digital Gold India (SafeGold). These firms have tied up with service providers like PayTm, Google Pay, Amazon Pay and PhonePe, among others, to sell digital gold via their platforms.
- You can buy, sell and redeem digital gold through various online platforms and mobile apps.
Pros of Digital Gold Investment
- Digital gold essentially facilitates holding gold virtually without owning a safe or bank locker.
- Unlike the price of physical gold, which varies across states and cities within India, digital gold prices have a fixed value across the country.
- You can sell or redeem digital gold at the click of a button. Once sold, the value of your gold will be instantly transferred to your bank account. If you want to redeem your holding, physical gold will be delivered to your doorstep.
Cons of Digital Gold Investment
- A lack of regulatory agencies, governing rules, and trading regulations make digital gold transactions prone to fraud.
- As of now, an investor can invest up to a maximum of Rs. 2 lakhs in digital gold. This upper limit might not be attractive to investors looking to make larger investments.
- Digital gold provides charges higher gold price and digital gold attracts 3% of GST.
Sovereign Gold Bond vs Digital Gold: Which One to Pick?
It is tough to choose between Sovereign Gold Bonds and Digital Gold. Digital Gold and Sovereign Gold Bonds are innovative alternatives compared to physical gold. Therefore, before investing, you must compare gold bonds vs digital gold. The key differences between the two are:
- Trading: You can buy and sell Sovereign Gold Bonds on the stock exchanges. Digital Gold, on the other hand, is not traded in the stock market. However, you can buy/sell Digital Gold anytime (24×7) at your convenience.
- Holding Period: There is no fixed holding period for digital gold; you can sell it anytime at the current market price, making it a liquid asset. In comparison, Sovereign Gold Bonds have a minimum holding period of 5 years, however, can be sold on stock exchanges before 5 years as well but liquidity available on the stock exchange is a constraint.
- Affordability: For the 2021-22 fiscal year, the Reserve Bank of India has notified that the issuance price of one gram of sovereign gold bond is Rs. 4,791. In contrast, the minimum investment in digital gold costs as low as Re. 1, making it the more affordable option.
- Storage: When you buy a certain amount of digital gold, an equivalent amount of gold is stored in physical form in a locker, while SGB is government securities, where no physical gold is involved and have highest security level.
- Interest Yield: Sovereign gold bonds yield 2.5% interest (over and above the appreciation in gold prices) on the invested amount, which is credited to your bank account semi-annually. You do not get any interest on digital gold. The only way you earn returns is through gold price appreciation. This way, Sovereign Gold Bonds give you an additional interest of 2.5% per annum.
- Costs Incurred: A 3% GST is levied on digital gold, while no GST is levied on Sovereign Gold Bonds, but you have to bear the Demat account opening and transaction costs if held in demat form.
The digital era has ushered in varied and innovative investment forms while sparking a debate on gold bonds vs digital gold. While both have their share of pros and cons, they are both good alternatives to buying physical gold. Moreover, these investments have made acquiring gold quite affordable for middle and low income groups.
Also, you must be clear about whether you want to make a long-term or short-term investment or whether you want interest or not, and so on. While Sovereign Gold Bonds (SGB) offer you higher returns, digital gold gives you the flexibility to liquidate your investment anytime. Depending on your financial goals and other preferences, you can choose between SGB and digital gold.
How does digital gold work?
Digital gold allows investors to buy online gold in digitised form; hence, an equivalent amount of physical gold is kept in the vaults in your name. You can buy, sell, and redeem digital gold through various online platforms and mobile apps.
How long can I hold digital gold?
You can hold digital gold for as long as you wish. For the first five years, you need not pay any storage fee to the seller, and the seller will hold your digital gold for free. You must pay the storage fee if you do not want to sell or redeem gold after five years.
Can I convert Sovereign Gold Bonds to physical gold?
No, you cannot convert sovereign gold bonds to physical gold. The bonds are available in digital or paper format only. You can sell and convert them to cash and use the money to buy physical gold.
Is SGB taxable after 5 years?
SGBs if redeemed with RBI, capital gains are exempt. Investors can redeem the SGB starting after 5 years on half yearly interest payment dates.
What are the risks of digital gold?
It has benefits like easy exchange and secure storage but also drawbacks, including market instability and regulatory restrictions.
How many years can I hold digital gold in India?
Digital gold can be held for a maximum period of 5 years.
Can we convert digital gold to cash?
You must sign into your account with the platform where you purchased the digital gold to convert it to cash. Then, you’ll have to sell your digital gold at the going rate. The site will then charge your bank account with the sale’s revenues.