SGB, Gold ETF or Physical Gold: How They Differ
- The three, side by side
- The interest is the part people miss
- Liquidity is not the same as tradability
- Counterparty, put plainly
- Tax
- How to choose
- A note on allocation
- Where this fits
All three track the price of gold. What separates them is everything else: what you pay to get in, what you lose getting out, how quickly you can sell, who you are relying on, and whether the thing you own can be worn at a wedding.
The three, side by side
| Sovereign Gold Bond | Gold ETF | Physical gold | |
|---|---|---|---|
| What you own | A government security denominated in grams of gold | Units of a fund holding gold | The metal |
| Entry cost | Nil beyond the issue price | Expense ratio, brokerage | Making charges, GST, hallmarking |
| Ongoing cost | None | Expense ratio, deducted daily | Locker rent or storage risk |
| Exit cost | None on redemption at maturity | Brokerage, bid-ask spread | Purity adjustment, melting deduction |
| Interest | Yes, paid periodically on the issue value | No | No |
| Liquidity | Exit windows, or sell on exchange where traded | Same day on exchange | Immediate but at a discount |
| Counterparty | Sovereign | Fund and its custodian | None, and none to complain to |
| Can be worn | No | No | Yes |
Read the entry and exit rows together. On physical jewellery you can easily lose 12% to 20% of your money on the round trip before the gold price does anything at all. On the other two the round-trip friction is a fraction of one percent.
The interest is the part people miss
A sovereign gold bond pays interest on the original investment amount, in addition to tracking the metal price. Neither of the other two pays anything.
Over a long hold this compounds into a material difference. On ₹5,00,000 held eight years, interest alone adds a meaningful sum that a gold ETF holder simply does not receive, and a jewellery holder does not receive while also paying locker rent. Two of the three routes cost you money to hold; one pays you.
Interest rates, issue terms, tenor and the availability of new issues are set by the issuer and change. Check the current terms before assuming any figure.
Liquidity is not the same as tradability
Gold ETF is the most liquid in the ordinary sense. Sell during market hours, receive the proceeds on the normal settlement cycle. On a thinly traded fund the bid-ask spread can be wider than the expense ratio, so check volume before assuming the quoted price is the price you will get.
Sovereign gold bonds have a defined tenor with early exit permitted at specified points, and the bonds are also listed. Exchange liquidity has historically been patchy, and bonds have often traded at a discount to their underlying value, which means selling early can cost more than the convenience is worth.
Physical gold is instantly saleable and that is precisely the trap. You can convert it to cash this afternoon, at whatever the jeweller in front of you offers, minus deductions you will not enjoy. The speed is real; the price is not good.
Counterparty, put plainly
An ETF holder relies on the fund and its custodian. A bondholder relies on the sovereign. Someone with a necklace in a locker relies on nobody, which sounds like an advantage and is a mixed one: there is no institution to fail, and equally no institution to compensate you if the locker is emptied. Bank lockers are governed by the terms you signed, and those terms rarely make the bank an insurer of contents.
Tax
The three are not taxed identically. For tax year 2026-27 under the Income-tax Act, 2025, physical gold is long-term once held more than 24 months and a listed gold ETF once held more than 12 months; long-term gains are taxed at 12.5% under section 197, without indexation, and short-term gains at your slab rate. SGB interest is taxable at your slab rate. The gain on redeeming an SGB is exempt under section 70(1)(x), as substituted by the Finance Act, 2026, only for an individual who held it from original issue till maturity; bonds bought on the exchange, and bonds sold or redeemed before maturity, are taxed as capital gains.
Those differences can be large enough to change which route wins, so this is one of the few cases where checking the current position before committing is not box-ticking. Ask specifically about: redemption at maturity versus sale before it, and whether the periodic interest is taxed differently from the price gain.
How to choose
Holding for years, no need to touch it: the bond is usually the strongest, because the interest is free return, there are no ongoing charges, and the counterparty is the sovereign. The cost is flexibility.
Wanting to trade the price, or hold a small tactical allocation: the ETF, because you can be out the same day and position sizes can be small.
Buying for a wedding, a gift, or because it should exist as an object: physical, and treat the making charge as the price of the object rather than pretending it is an investment cost. That reframing is the whole point.
What rarely makes sense is buying jewellery as a store of value while telling yourself the making charge does not matter. It is the largest single cost in the entire decision and it does not come back.
A note on allocation
Whichever wrapper you use, gold is usually a minority position. It produces no earnings and no dividend; its return comes entirely from someone paying more for it later. That is a legitimate diversifier and a poor engine. If gold is the largest thing you own, the question worth asking is not which wrapper but why.
Where this fits
- The cost comparison worked in full: gold or mutual funds, after charges and tax
- The existing comparison: gold vs mutual fund
- What inflation does to a holding: real return after inflation
- Measuring what you earned: XIRR or CAGR