What are alternatives to Sovereign Gold Bonds to invest in Gold?

As the Government has not issued new SGB issues, many investors are looking for alternatives to Sovereign Gold Bonds to invest in Gold. What are the options?

Sovereign Gold Bonds have proven to be highly successful for gold investors, primarily due to their attractive features, including a 2.5% interest payout, tax-free gains upon maturity, and the upward trend in gold prices. However, the Government has not introduced any new issues for several months. However, for many months Government has not come out with new issues. Hence, people are searching for alternatives to Sovereign Gold Bonds.

This article does not focus on the advantages and disadvantages of investing in gold. Rather, it aims to offer an overview of the various alternatives to Sovereign Gold Bonds.

# Existing Sovereign Gold Bonds

The existing Sovereign Gold Bonds (SGBs) are available for purchase on the secondary market. The price at which you can buy them will be determined by the demand and supply. It is important to note that the interest payments you receive will be calculated based on the original issue price rather than the prevailing market price. For instance, if the issue price of an SGB was Rs. 6,000 and the current market price is Rs. 7,000, the interest payout of 2.5% on your future holdings will be based on Rs. 6,000, not on the current price of Rs. 7,000.

The second crucial factor to consider is the time to maturity. Since these are the earlier issued Sovereign Gold Bonds (SGBs), the holding period will be eight years from the date of issue rather than from the date of your purchase. For instance, SGBFEB32IV was issued in February 2024, with a maturity date set for February 2032. Therefore, regardless of when you acquire this bond from the secondary market within the eight-year timeframe from February 2024 to February 2032, the maturity date remains February 2032 for you.

It is essential to understand that if you retain the Sovereign Gold Bond (SGB) until its maturity, any gains you realize will be exempt from taxation. Conversely, should you choose to sell the bond in the secondary market, the gains will be subject to a tax rate of 12.5% as long-term capital gains (LTCG) if the holding period exceeds one year. If the holding period is less than one year, the gains will be taxed according to your applicable income tax bracket as short-term capital gains (STCG).

Below is the list of SGBs available from the secondary market (as of 16th Sept 2024).

# Gold ETF or Gold Exchange Traded Funds

You can buy a minimum of one unit of Gold ETF and the underlying asset is gold. You need to have a Demat account to buy and sell the gold ETF. There are currently 16 Gold ETFs available in the secondary market. The taxation of Gold ETF is – If you sell it within a year, then the gain is taxed as per your tax slab. However, if you sell it after a year, then the gain is taxed at 12.5%.

# Gold Mutual Funds

Gold Mutual Funds typically invest in Gold ETFs to provide liquidity to their investors. For example, SBI Gold Fund will invest in the SBI Gold ETF. You can invest in Gold Mutual Funds like other mutual funds and no need to worry about liquidity issues (which are there in Gold ETFs). However, in terms of cost, Gold Mutual Funds are costlier than the Gold ETF. Hence, due to this bit higher cost factor, your returns may not actually match the underlying Gold ETF returns. But it will resolve the liquidity issue. Below are the Gold Mutual Funds currently available in India. The taxation of Gold Mutual Funds is – If you sold within two years (24 months), then the gain is taxed as per your tax slab. However, if you sold it after two years (24 months), then the gain is taxed at 12.5%.

# What about Physical Gold?

If the purpose is looking Gold as an investment, then better to avoid investing through physical mode. The reasons are – Safe keeping risk, purity risk and buying and selling price partiy. However, if the purpose is for your own usage, then you can explore physical gold. But as an investment, better to avoid through physical gold mode.

Finally, sharing the taxation of gold post Budget 2024.

Refer my earlier posts on Gold at “Blog Posts on Gold“.