Is SGB Better Than FD?

What makes sovereign gold bonds a smart gold investment?

If you like the idea of owning gold without storing it at home, Sovereign Gold Bonds can feel like a smart alternative. Issued by the Reserve Bank of India on behalf of the Government of India, SGBs let you invest in gold in paper or digital form. You invest in grams of gold, starting from as little as one gram, while earning a fixed annual interest of 2.50%, paid twice a year.

These bonds come with an eight-year tenure, with an early exit option after five years, and can also be traded on stock exchanges. You benefit from gold price appreciation without worrying about storage or purity. And when you need funds urgently, a gold loan against jewellery helps you meet expenses without selling your investment.

Overview of fixed deposits (FD)

Fixed Deposits (FD) are one of the most popular and traditional investment options in India. Offered by banks and financial institutions, FDs involve depositing a lump sum amount for a fixed tenure at a predetermined interest rate. The tenure can range from a few months to several years, typically from 7 days to 10 years. FDs provide a safe and secure investment avenue, as they are not subject to market fluctuations. 

The interest rates on FDs vary depending on the bank, tenure, and current economic conditions, but they generally offer higher returns than regular savings accounts. Investors can choose between cumulative FDs, where the interest is reinvested and paid at maturity, or non-cumulative FDs, where interest is paid out periodically. Premature withdrawal is possible, but it often incurs a penalty. FDs are ideal for risk-averse investors seeking stable and guaranteed returns.

SGB better than FD: Comparison of returns

When comparing returns, Sovereign Gold Bonds (SGB) often outperform Fixed Deposits (FD). SGBs offer a dual benefit: a fixed annual interest rate of 2.50% and the potential appreciation of gold prices over time. This combination can lead to higher overall returns, especially during periods of rising gold prices. 

In contrast, FDs provide a fixed interest rate, which, while secure, does not account for inflation or potential increases in gold value. For example, if gold prices increase significantly during the investment period, SGB holders benefit directly from this appreciation, whereas FD holders receive only the predetermined interest. Additionally, the tax exemption on capital gains for SGBs held until maturity further enhances their attractiveness. Therefore, for investors looking for potentially higher returns with a moderate level of risk, SGBs can be a superior choice compared to traditional FDs.

Is SGB better than FD?

Whether Sovereign Gold Bonds (SGB) are better than Fixed Deposits (FD) depends on individual financial goals and risk tolerance. SGBs offer the potential for higher returns through gold price appreciation and a fixed interest rate, making them attractive for those willing to accept some level of market risk. They also provide tax benefits on capital gains if held until maturity. 

However, SGBs have an eight-year tenure, with early exit options available only after five years, which might not suit those needing liquidity. On the other hand, FDs provide guaranteed, stable returns without exposure to market fluctuations, making them ideal for risk-averse investors. FDs offer flexible tenures and easy access to funds through premature withdrawal, though it might incur a penalty. Ultimately, the choice between SGB and FD should align with the investor's financial objectives, risk appetite, and need for liquidity.

Difference between SGB and FD

The primary difference between Sovereign Gold Bonds (SGB) and Fixed Deposits (FD) lies in their nature and returns. SGBs are government-backed securities linked to gold prices, offering a fixed annual interest of 2.50% and potential capital appreciation based on gold price movements. They have a tenure of eight years with limited early exit options. 

In contrast, FDs are fixed-income instruments provided by banks and financial institutions, offering a predetermined interest rate over a chosen tenure, typically ranging from 7 days to 10 years. FDs guarantee returns, making them a secure investment without exposure to market risks. SGBs provide tax benefits on capital gains if held until maturity, while FDs may be subject to tax on the interest earned. Liquidity is higher in FDs due to the possibility of premature withdrawal, albeit with a penalty, whereas SGBs have limited liquidity options.

SGB better than FD: Tax implications

Sovereign Gold Bonds (SGB) offer favourable tax implications compared to Fixed Deposits (FD). Interest earned on SGBs is taxable as per the investor’s income tax slab, similar to FDs. However, the key advantage of SGBs lies in the capital gains tax exemption. If SGBs are held until maturity, any capital gains arising from the appreciation in gold prices are exempt from tax. This can significantly enhance the overall returns from SGBs. 

In contrast, interest earned on FDs is fully taxable, and there are no tax exemptions on the maturity amount. Additionally, the principal amount in FDs does not benefit from any price appreciation. Thus, from a tax perspective, SGBs can be more beneficial for long-term investors looking to maximise their returns through both interest and capital gains, whereas FDs remain fully taxable with no exemptions.

Tax implications including TDS and exemptions on SBG and FD

Tax implications for Sovereign Gold Bonds (SGB) and Fixed Deposits (FD) vary significantly. For SGBs, the interest earned is taxable according to the investor's income tax slab. However, SGBs offer a significant tax advantage: if held until maturity, the capital gains arising from the appreciation in gold prices are exempt from tax. This exemption can substantially increase the effective returns for long-term investors. 

Conversely, FDs are subject to Tax Deducted at Source (TDS) if the interest income exceeds a certain threshold, typically ₹40,000 for general investors and ₹50,000 for senior citizens. The interest earned on FDs is fully taxable, with no exemptions, and is added to the investor’s total income for tax purposes. Therefore, while both investment options are subject to taxation on interest income, SGBs provide a distinct tax benefit on capital gains, making them more tax-efficient for long-term investors.

If you are evaluating tax-efficient investments but need short-term liquidity without disturbing them, check your gold loan eligibility today and see how your gold jewellery can support your financial plans when required.