SGB vs Physical Gold vs Gold ETF: The central government has decided to issue gold bonds in six installments under the Sovereign Gold Bond Scheme 2021-22 between May 2021 and September 2021. Its first trench will open for subscription on May 17, for which the issue price has been fixed at Rs 4777 per gram. On application and payment from online mode, a discount of Rs 50 per gram will also be available.
There is a perception about gold bonds that it is the best option to invest in gold, but it is important to assess how beneficial it is. The issue price has been kept at Rs 4777 for the gold bond opening from May 17, that is, it will be priced at Rs 47,770 for ten grams. To compare gold bonds, physical gold and gold ETFs, we have to see how much return we will get after 8 years on each of these types of investments. Here eight years have been taken because the maturity period of the gold bond is 8 years.
- 8 years ago, the price of gold was Rs 29,600, which is around 47,700 at this time. That is, in the last 8 years, gold has got a return of about 60 percent. If this trend continues even further, then the price of 10 grams of gold should be close to Rs 76,320 in eight years.
- The form in which you buy gold may have little effect on the returns. For example, if you have bought a gold bar, you will get better value while selling it, but if you have bought gold in the form of jewelery, while selling it, you can get a lower price based on the purity rather than its full weight.
- On selling jewelry, making charges plus GST will also be deducted, that is, in no case will you get a return of Rs 76,320.
- Apart from this, there will also be a long-term or short-term capital gains tax on the returns.
- Looking at the previous trend in Gold ETFs, an annualized return of about 6.4 per cent (SBI Gold ETF) has been received on the investment made 8 years ago.
- If this trend continues, the value of investment of 47,700 in the next eight years will be around Rs 78,400.
- Tax will also have to be paid on ETFs and the expense ratio will also have to be paid. In such a situation, the returns on it can be reduced.
- There is also the benefit of indexation on investing in ETFs. This benefit is available only in ETFs.
- SGB bonds will get interest at the rate of 2.5 per cent per annum. That is, on the investment of Rs 47,700, you will get Rs 1192.50 every year and in 9 years, a total of Rs 9,540 will be available as interest. However, tax will have to be paid according to the slab on it.
- At the time of 8 years of maturity, the investment value will be Rs 76,320, on which tax will not be paid.
- In this way, Rs 47,700 invested in SGB bonds will add Rs 85,860 in 8 years. In this, tax liability will be made only on Rs 9540 of interest. It is clear that your returns in this scheme will be higher than both physical gold and gold ETAF.
Some rules about SGB
- The minimum investment in these bonds is equal to 1 gram of gold. Individuals are allowed to invest a maximum of 4 kg, HUF also 4 kg, and other institutions such as trusts and trusts invest up to a maximum of 20 kg of gold in a financial year.
- The maturity period of the bond is 8 years, in which, after 5 years, there is an option to exit on the next interest payment dates.
For this, the same rules of KYC are applicable for physical gold.
- Gold bond maturity is tax free. There is nothing in the expense ratio.
- Being supported by the Indian government, there is no risk of default.
(Based on a conversation with IIFL Securities Vice President – Commodities & Research – Anuj Gupta and Tax & Investment Expert Balwant Jain)