Sovereign Gold Bonds (SGBs) — The Superior Choice When Available
SGBs are government securities denominated in grams of gold. They offer a unique combination of gold price appreciation plus 2.5% annual interest. Most importantly, capital gains on redemption at maturity (8 years) are completely tax-free.
Gold ETFs — Flexibility with a Tax Cost
Gold ETFs trade on stock exchanges like shares. You can buy and sell any time during market hours, making them more liquid than SGBs. However, LTCG tax of 20% with indexation applies after 3 years — a meaningful cost compared to SGBs.
Side-by-Side Comparison
| Feature | Gold ETF | SGB |
|---|---|---|
| Returns | Gold price only | Gold + 2.5% p.a. interest |
| LTCG Tax | 20% with indexation | Nil at maturity |
| Liquidity | Very high (daily) | Low (secondary market) |
| Lock-in | None | 8 years (5 after early exit) |
| Demat Required | Yes | No (optional) |
The Verdict
If you have an 8+ year horizon and can handle lower liquidity: SGBs win clearly — the tax-free status and 2.5% annual interest make them superior in total return. For tactical gold allocation or shorter horizons: Gold ETFs are more practical.
The SGB advantage over ETF can amount to 3–4% additional CAGR over 8 years when you factor in the tax differential and interest income.