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Sovereign Gold Bond vs Digital Gold: Which is the Better Investment?

Investing in gold has always been a popular choice for individuals looking to diversify their investment portfolio or hedge against economic uncertainties. With the advancement of technology and evolving investment options, investors now have two intriguing choices: Sovereign Gold Bonds (SGBs) and Digital Gold. This article aims to analyse Sovereign Gold Bonds vs Digital Gold comprehensively.

What are Sovereign Gold Bonds?

On behalf of the government, the Reserve Bank of India issues gold bonds. Unlike many others, these bonds are issued in tiny tranches, allowing investors to purchase small amounts. 2015 marked the introduction of the Sovereign Gold Bond programme by the Indian government. Under this system, gold is sold per unit, with each unit’s value determined by its 999 purity. SGBs are an excellent substitute for the tangible gold one must protect. Alternatively, sovereign gold bonds are available in paper/digital format. 

Some Key Characteristics of Sovereign Gold Bonds 

1. The government of India annually determines the utmost subscription limit for Sovereign Gold Bonds. Currently, the limit is 4 kgs for individuals and Hindu Undivided Families (HUFs) and 20 kgs for trusts and other entities. 

2. Sovereign Gold Bonds’ purchase and redemption prices are directly proportional to the price of gold on the market.

3. The SG bonds have an 8-year maturity but can be sold after only 5 years.

4. Sovereign gold bonds can be procured through a bank and Demat account or via agents associated with post offices, nationalised banks, licenced stock exchanges, and more.

Advantages of Investing in Sovereign Gold Bonds

1. The paper and Demat formats for sovereign gold bonds are available. Consequently, the cost of storing tangible gold is avoided. If you only wish to purchase gold for investment purposes, SBG is an excellent choice.

2. The greatest benefit of investing in Sovereign Gold Bonds is that they offer a 2.5% annual yield on the principal. This is in addition to the returns you receive from the increase in gold’s value. 

3. any capital gains on Sovereign Gold Bonds are exempt from taxation after the eight-year maturity period.

You may also read: How to Buy Sovereign Gold Bond?

What is the Digital Gold?

Gold available in a digital format is referred to as “digital gold” When purchasing digital gold, you pay for the gold and receive a certificate indicating the quantity of gold acquired. Once the certificate has been issued, an equivalent quantity of physical gold is purchased on your behalf and deposited in a secure vault. 

Some Key Characteristics of Digital Gold

1. Digital 24K gold can be purchased for as little as 1 pound sterling, making it affordable for people of all income levels.

2. Digital gold has no production or storage fees, unlike physical gold.

3. In India, Augmont Goldtech and Digital Gold India (SafeGold) are the primary sellers of digital gold. These companies have partnered with service providers, such as Paytm, Google Pay, Amazon Pay and others, to sell digital gold on their respective platforms.

4. Multiple online platforms and mobile applications allow for the purchase, sale, and redemption of digital gold. 

Advantages of Investing in Digital Gold

1. Digital gold allows for the virtual storage of gold without needing a secure bank vault.

2. At the press of a button, you can sell or redeem digital gold. Once your gold has been sold, the proceeds will be transmitted immediately to your bank account. Gold will be delivered to your door if you wish to redeem your holding. 

Sovereign Gold Bonds vs Digital Gold- A Comparative Analysis

Digital Gold and Sovereign Gold Bonds are revolutionary alternatives to physical gold. Before investing, it is necessary to compare gold bonds to digital gold. Key differences between the two include:

  1. Nature of Investment

SGBs are a form of investment in gold, allowing investors to hold gold in a paperless form without physical delivery. Investors receive interest on their investment in addition to the potential gains from changes in the gold price. Digital gold, on the other hand, represents a debt instrument issued by a government or corporation, where investors lend money to the issuer for a fixed period in return for periodic interest payments.

  1. Investment Period and Exit Option

SGBs have a fixed tenure of 8 years, with an exit option available from the 5th year onwards. Investors can choose to sell their bonds on the stock exchange if they want to exit before maturity. Digital gold may have different maturity periods depending on the terms set by the issuer.

  1. Liquidity

SGBs are listed on stock exchanges, which means investors can sell them on the secondary market before maturity if they want to exit their investment. The liquidity of SGBs depends on market demand. Digital gold can also be traded on secondary markets, but its liquidity may vary depending on the specific bond and market conditions.

  1. Interest Yield

Sovereign gold bonds yield 2.5% interest (above and beyond the appreciation in gold prices), which is deposited into your bank account semi-annually. Digital gold does not accrue interest. Gold price appreciation is the only means to generate returns. Sovereign Gold Bonds provide an additional 2.5% annual interest in this manner. 

  1. Taxation

The interest earned on SGBs is taxable per India’s income tax laws. However, the capital gains arising from the redemption of SGBs at maturity or earlier are exempt from capital gains tax for individual investors. Taxation on digital gold can vary depending on the jurisdiction and specific tax regulations.

Also Read: Sovereign Gold Bond vs Gold ETF

The Takeaway-

The comparison between Sovereign Gold Bonds and Digital Gold has arisen due to the creative investment types brought about by the digital age. Despite the benefits and drawbacks of each, they are both acceptable alternatives to buying actual gold. Additionally, these investments have significantly reduced the cost of purchasing gold for middle-class and low-income individuals. 

Sovereign Gold Bonds (SGB) offer higher yields, in contrast to digital gold, making it possible to liquidate your investment at any time. The choice between SGB and digital gold is yours to make, and it will depend on your preferences and objectives towards your finances.

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