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SGBs vs PPFs: A quick snapshot to decide which works for you

13 Mins 19 May 2023 0 COMMENT

Sovereign Gold Bonds (SGBs) and Public Provident Fund (PPF) are popular fixed income investments in India; especially for those looking for tax efficient long-term investment options. 

While SGBs offer the benefits of investing in gold without actually holding physical gold, PPF is like a reliable and sturdy vehicle that offers stable returns over a longer period of time.

Let's delve deeper into the features and benefits of these two investment options:

Exploring the Various Ways to Invest in Gold

There are several options to invest in gold in India, including:

Physical gold: You can buy gold jewellery, coins, bars, or bullion from a jeweller or dealer.

Sovereign Gold Bonds: These are government securities issued by the Reserve Bank of India (RBI) and offer a safe and easy way to invest in gold.

Gold Exchange Traded Funds (ETFs): These are similar to mutual funds, but instead of investing in stocks, they invest in gold. Gold ETFs are traded on the stock exchange and can be bought and sold like stocks.

Gold Mutual Funds: These are mutual funds that invest in gold mining companies, bullion, and other related assets.

Gold Accumulation Plans: Some banks and jewellers offer gold accumulation plans, which allow you to buy gold in small amounts regularly over a period of time.

Digital Gold: You can also invest in gold online through digital gold platforms, which allow you to buy and sell gold in small amounts at real-time prices.

Investing in Sovereign Gold Bonds 

Sovereign Gold Bonds (SGBs) are a safe and convenient investment option for those who wish to invest in gold without having to worry about the storage and security of physical gold. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are denominated in grams of gold. Investors can subscribe to SGBs during the issuance period and hold them in dematerialized (demat) form.

SGBs provide a fixed annual interest rate of 2.50% on the initial investment amount, and the returns are tax-free if the bonds are held until maturity. Moreover, SGBs can also be used as collateral for loans, and they can be traded on the stock exchange, providing liquidity to investors.

SGBs offer several advantages over physical gold investments, including no storage or security concerns, no making charges, and a guaranteed purity level. Additionally, SGBs are a good investment option for those who believe in the long-term growth potential of gold and want to diversify their investment portfolio. 

Overall, SGBs are a valuable investment option for those who wish to invest in gold in a safe and hassle-free manner.

Advantages of Investing in SGBs

Safety and Security: SGBs are government-backed securities issued by the Reserve Bank of India (RBI), making them a secure and safe investment option.

No Storage Hassles: Unlike physical gold, there is no need to worry about storage and security when you invest in SGBs.

Attractive Returns: SGBs offer a fixed interest rate of 2.50% per annum on the initial investment amount, making them a more attractive investment option than physical gold or gold jewellery.

Capital Appreciation: SGBs also offer capital appreciation as their value increases with the rise in the price of gold.

Tax Benefits: The interest earned on SGBs is exempt from income tax, and long-term capital gains tax is not applicable if held until maturity.

Disadvantages of Investing in SGBs

Lack of liquidity: While SGBs can be traded on stock exchanges, the liquidity may not be as high as other investment options. It can take some time to sell SGBs and receive the funds.

Fixed tenure: SGBs have a fixed tenure of 8 years, which means that the investment cannot be redeemed before maturity. This lack of flexibility may not be suitable for investors who prefer to have quick access to funds.

Market risks: The price of gold is subject to market fluctuations, which means that the value of SGBs can also be affected by these changes. Investors may face losses if the price of gold decreases significantly during the investment tenure.

Capital gains tax: Capital gains tax does not apply to SGB, only the interest earned on SGBs are taxable

Initial investment: SGBs require a minimum investment of 1 gram of gold (approx. Rs 5000 as on May 2023) which is slightly higher than some modes of investment.

Making the Most of Your Savings with Public Provident Funds

Public Provident Fund (PPF) is a long-term investment option offered by the Government of India. It is a popular investment tool among risk-averse investors due to its safety and tax benefits. The investment tenure is for 15 years and can be extended for an additional 5 years. The interest rates are declared by the government every quarter and are usually higher than fixed deposits.

PPF also offers tax benefits under Section 80C of the Income Tax Act 1961. The interest earned and the maturity amount are tax-free. The minimum investment amount is Rs. 500, and the maximum is Rs. 1.5 lakh per year. Plus, investors can take a loan against their PPF account after completing 3 years of investment.

Advantages of Investing in PPFs

  • PPFs offer a secure and guaranteed return on investment, as they are backed by the government of India.
  • PPFs have a long investment horizon of 15 years, which allows for compounding of interest and higher returns.
  • Investments in PPFs qualify for tax deductions under Section 80C of the Income Tax Act up to a limit of Rs. 1.5 lakh per year.
  • PPFs can be opened at any post office or authorized bank, making them easily accessible to investors.
  • PPFs come with the flexibility of partial withdrawals and loan facilities, which can be helpful in times of financial emergencies.

Disadvantages of Investing in PPFs

  • The long lock-in period of 15 years, with partial withdrawals allowed only after 7 years.
  • Interest rate is subject to change every quarter based on government policies.
  • Investment limit capped at Rs. 1.5 lakh per year

SGBs vs PPFs: A quick snapshot

Parameters

SGB

PPF

Returns

Capital appreciation + 2.5% interest

Interest rates are revised every quarter

Lock-in

8 years to maturity with exit option after 5 years

15 years lock-in with partial withdrawal after 5 years capped at 50%

Tax exemption on investment

Interest earned – taxable at withdrawal

Capital gains – not taxable at withdrawal

Interest earned - not taxable

Tax implication on maturity

Investment amount not exempt under Sec. 80C of IT Act

Investment amount exempt under Sec. 80C of IT Act

Minimum Investment

1 gm of gold

Rs 500

Maximum Investment

4kg of gold

Rs 1.5 lakh

Conclusion

Both SGBs and PPFs are popular investment options in India. SGBs offer investors the opportunity to invest in gold without having to worry about storage and security issues. They also provide an attractive fixed interest rate and tax benefits. On the other hand, PPFs provide a stable and secure long-term investment option with guaranteed returns and tax benefits.

Ultimately, the choice between SGBs and PPFs depends on the investor's individual financial goals and risk appetite. 

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.