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Fixed Deposit vs Sovereign Gold Bond: Which is Better?

Updated on: 29 Dec 2023 | 10 min read

In the ever-evolving world of investments, the choice between the stability of Fixed Deposits and the appeal of gold remains a pivotal decision for many. Sovereign gold bonds, often praised as a shield against inflation, promise to protect your purchasing power during economic shifts. Conversely, fixed deposits offer reliable savings growth with a guaranteed interest rate, combining safety with ease of access.

 

Are you at a crossroads, deciding whether to anchor your investments in the lasting value of gold or the predictable returns of fixed deposits? This article aims to clarify sovereign gold bonds and fixed deposits, laying out a clear comparison based on risk, potential returns, and flexibility. Whether you are a seasoned investor or taking your first steps in finance, understanding the details of these options is key.

What is a Sovereign Gold Bond?

Sovereign Gold Bonds, or SGBs, are Government securities denominated in grams of gold. This means that they are securities that are an effective substitute for owning physical gold. The Reserve Bank of India issues Sovereign Gold Bonds (SGBs) on behalf of the government. These bonds are issued in small tranches, enabling you to purchase small amounts easily.

The tenure for SGBs is eight years, while the subscription amount per fiscal year varies depending on the investor. For example:

  • An Indian resident can buy up to 4 kg of gold.
  • Charitable foundations and trusts can buy up to 20 kg of gold.
  • Joint families or Hindu Undivided Families can buy up to 4 kg of gold.
  • Minors can invest in gold bonds after registering an adult on their behalf.

Advantages of Investing in SGBs

Investing in gold bonds can yield high gains with potential capital appreciation. Some of the key benefits of investing in SGBs are:

  • SGBs are low-risk as they are government-issued.
  • RBI offers a steady 2.5% interest rate on SGBs, paid half-yearly, plus gains from gold price appreciation.
  • It is easy to invest in SGBs for Indian residents, including individuals, institutions, HUFs, and trusts.
  • SGBs can be purchased online or offline with basic KYC documents like Aadhaar and PAN.
  • Affordable investment starting at 1 gm of gold, with a Rs 50 discount per gram for online purchases.

Disadvantages of Investing in SGBs

With upsides, there also come downsides. Let's take a look at the disadvantages of investing in SGBs:

  • Potential for Capital Loss: While the quantity of gold paid for remains constant, there's a risk of capital depreciation if gold's market value declines.
  • Limited Liquidity: Compared to physical gold, SGBs offer lower liquidity due to their 5-year early redemption lock-in. Trading on stock exchanges might also have limited volume and frequency.
  • Taxable Interest Income: Interest earned on SGBs is subject to taxation under the Income Tax Act 1961. However, capital gains at redemption for individuals are exempt, and long-term capital gains from transfers are eligible for indexation benefits.

What is a Fixed Deposit?

Fixed Deposits (FDs) are a secure investment tool where a fixed sum of money is deposited with a bank or a Deposit Non-Banking Financial Company (NBFC) for a specified tenure, earning interest until maturity. Established as a popular investment choice since the early 1980s, FDs appeal to people across various income levels due to their numerous benefits.

You can initiate an FD in any nationalised bank or with an NBFC, where your deposited amount accrues interest and is repaid along with the principal at the end of the period. The maturity period of Fixed Deposits can range from as short as seven days to as long as 10 years, offering flexibility in terms of investment duration.

Advantages of Investing in Fixed Deposits

Like gold bonds, fixed deposits offer several benefits, making it hard to choose between FD and gold investment. Here are some of the benefits of investing in Fixed Deposits:

  • Fixed Deposits offer safe, steady returns with minimal interest rate risk, ensuring stable gains over the term.
  • Minimum FD amounts vary, starting from Rs. 1,000 in some banks, making them accessible to all income groups.
  • FD accounts can be easily opened online with an existing savings account or at a bank.
  • FDs are open to Indian residents, NRIs, minors (with adult assistance), senior citizens, firms, companies, and societies/clubs.
  • FDs are flexible, allowing up to 90% overdraft against them and offering premature withdrawal options, albeit with a penalty.

Disadvantages of Investing in Fixed Deposits

Fixed Deposits, as safe as they are, come with their downsides. Let's take a look at some of them which might concern you as an investor:

  • Struggle Against Inflation: FD interest often falls short of outpacing inflation, especially post-tax, potentially leading to insufficient returns to cover the cost of living increase.
  • Taxable Interest: Interest from FDs is taxed as per your income slab and subjected to TDS (10% with PAN, 20% without), diminishing net returns.
  • Fixed Interest Rates Limit Upside: Interest rates of FDs remain unchanged throughout their tenure, meaning you can't benefit from rising rates unless you withdraw and reinvest, potentially missing higher returns.
  • Penalties on Early Withdrawal: Early withdrawal of FDs attracts penalties, usually 1% to 3% of interest, which can significantly reduce the interest earned, more so for larger amounts.
  • Lower Returns Than Other Investments: FDs generally yield lower returns, influenced by bank, tenure, and age, making them less attractive than other investment avenues.
  • Limited Liquidity: FDs offer restricted access to funds before maturity, with options like premature withdrawal or loans against FDs incurring additional costs or interest.

Differences between Sovereign Gold Bond and Fixed Deposit

Sovereign gold bond vs fixed deposit, which is a better investment option? Should you opt for an investment in gold or a fixed deposit? Both these instruments offer many benefits. The detailed table below on gold vs FD might help you arrive at a decision.

Aspect

Sovereign Gold Bonds (SGBs)

Fixed Deposits (FDs)

RiskPossibility of capital loss if gold prices decline; quantity of gold secure with GOI guarantee.Not subject to market volatility; real return affected by inflation; principal and interest insured up to ₹5 lakhs by DICGC.
ReturnsOffer attractive periodic returns at 2.5%, in addition to the potential for gold price appreciation.Returns are determined by the bank/NBFC at the onset, typically higher for senior citizens.
LiquidityCharacterised by lower liquidity compared to other investment forms.Provide more liquidity with the option to withdraw at any time, subject to a possible penalty for premature withdrawal.
Loan FacilityCan be used as collateral for obtaining loans from banks, financial institutions, and NBFCs.Loans can be secured against FDs; banks' borrowing amounts and conditions differ.
Tax BenefitsCapital gains are exempt from tax if held until maturity; offer tax-efficient investment.Interest earned is taxable; however, senior citizens can deduct up to ₹50,000 on interest income.

FD vs SGB: Which is Better for you?

When deciding between SGBs and FDs, both are safe places to put your extra money. If you're just starting out in the financial world, look closely at your willingness to take risks and understand the details before you put money into either option. Think about your financial needs for the near future and further ahead, and pick whether Sovereign Gold Bonds or Fixed Deposits match up better with what you're aiming for.

Choosing between FD and SGB comes down to which one better suits your financial plans.

FAQs

What are the different ways to invest in gold?

Earlier, if you wished to possess gold, the only way to do so was by purchasing the physical metal from the market. However, it came with many costs, such as polishing, storing, etc. But, today, several alternatives to physical gold, such as digital gold, SGBs (Sovereign Gold Bonds) and Gold ETFs (Equity Traded Funds), are available. You can invest in them to avoid maintenance expenses and earn interest on your investment.

What are tax-saver FDs?

Tax-saver Fixed Deposits allow you to claim a deduction of up to Rs. 1.5 lakhs from your net taxable income under Section 80(C) of the Income Tax Act. This deduction can be claimed only in the year the FD account is opened. Notably, the interest earned on Fixed Deposits is always taxable (with the exception of senior citizens who get a deduction of up to Rs. 50,000 on the interest income as well).

What are the risks associated with SGBs?

Loss of capital is the only risk associated with SGBs. The prices for gold bonds are dependent on the rates of gold in the international market. It goes up and down based on market conditions. You could incur a capital loss if the market price of gold falls.

What are the risks associated with FDs?

While fixed deposits have clear benefits, they also come with certain risks. For instance:

  • Not all fixed deposits have high liquidity.
  • Although bank FDs are safe, in case of a bank default, FDs allow you insurance claims for deposits of up to Rs. 5 lakh only.
  • Fixed deposits are known for their fixed returns. However, inflation can impact real returns.

Can I use SGBs as collateral for loans?

Yes, you can use Sovereign Gold Bonds as collateral for loans. Banks, financial institutions, and NBFCs accept SGBs as security against which you can borrow funds​​.

How is the interest from SGBs taxed?

The interest on SGBs is taxable under the Income Tax Act. Although capital gains on the bonds are exempt if held till maturity, the interest income is subject to tax in the hands of the investor. However, indexation benefits are available on the transfer of bonds​​.

Are there any benefits for senior citizens when investing in FDs?

Yes, senior citizens typically receive a higher interest rate on Fixed Deposits than the general public. This is a common practice across various financial institutions​​.

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