SGBs vs Gold ETFs: Making an Informed Choice? 

Here are two broad areas where SGBs score over ETFs:

1. LTCG Tax Exemption: LTCG arising from investing in SGBs is exempt from tax if one stays invested till maturity (8 years). (Kindly note that there’s no exemption on STCG Tax). Sale of ETFs, however, does attract long term / short term capital gains tax as applicable. This would eat into the returns that one would get out of capital appreciation. At present LTCG on sale of Gold is taxed at 20% (excluding other statutory levies) with Indexation Benefit.

LTCG Tax exemption gives SGBs a clear upper hand over Gold ETFs especially in the long run

2. Periodic Coupon Payments: With SGBs, one is guaranteed coupon payments (Frequency – Semi Annual) at a certain rate of interest, declared at the time of subscription (At present it is 2.5% p.a.). Thus, in addition to capital appreciation of the asset in consideration, the semi-annual coupon payments augment the overall returns. In contrast, Gold ETFs do not pay out any coupons.

Periodic Coupon Payments give a unique edge to SGBs over Gold ETFs

3. Sovereign Guarantee: An SGB comes with a Sovereign Guarantee. A Sovereign Guarantee helps giving investors, especially the conservative ones, a high degree of comfort. Gold ETFs do not come with Sovereign Guarantees (Nevertheless, Gold ETFs are tightly regulated and hence very safe too).

For the conservative SGB investor in particular, A Sovereign Guarantee can definitely serve as an added advantage over ETFs.

Thus LTCG Tax Exemption, Periodic Coupon Payments and Sovereign Guarantee are the three distinct advantages of SGBs over Gold ETFs.

Gold ETFs, on the other hand, score over SGBs in terms Liquidity. Liquidity is a desirable attribute for any financial asset. For instance, when it comes to investors who hold a short to medium term positional outlook on Gold, liquidity could be an important consideration for timing their entry and exit decisions. Similarly investors with a short term investing time horizon would also look at investing in a liquid alternative. Thus, liquidity is an area where ETFs have a conclusive edge over SGBs. SGBs come with a lock-in period of 5 years. The exchange platform does provide an exit route though, but liquidity is still a big concern here. However before one chooses to go for ETFs solely based on liquidity, it needs to be assessed whether the benefit of Liquidity comfortably outweighs all other considerations.

Note: Investing in Gold should be a carefully thought out decision and should not be driven by investment fads. In fact your decision to invest in any asset class for that matter should be driven by the outcome or the goal you wish to achieve rather than what is seen as the flavour of the season.

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