Gold Leasing vs SGBs — Which Can Provide High Returns?

In the 21st century, almost every smart investor has their portfolio diversified in gold. Because of the ever-increasing price of gold and its stability, millennials have been turning to gold investments in some form or another.

Some popular hold investment assets investors use are Digital Gold, Gold ETFs and Sovereign Gold Bonds(SGBs). With advancements in technology and attempts to give investors the highest possible returns on gold investments, a new gold investment asset called gold leasing has recently gained popularity. In this article, we’ll cover gold leasing vs SGBs, the two gold investments that give extra interest on top of gold returns and check which can suit one’s portfolio better.

Sovereign Gold Bonds

These are RBI-issued Bonds. They substitute for physical gold and provide 2.5% extra interest on top of the gold price appreciation. The interest is credited in a half-yearly manner. They come with a long lock-in period of 8 yrs. These bonds are sold per unit basis such that the value is derived from underlying gold grams with 99.9% purity for each unit sold. These bonds are made available in tranches throughout the year. 1 unit of SGB is equivalent to 1 gm of gold.

Gold leasing

Gold leasing is the latest innovation in gold investments. It allows users to make an additional 5% interest every year on top of historical gold returns. Using gold leasing, investors can lease their gold metal (Digital Gold) to jewellers(lessee), who use it as part of their working capital. These jewellers, in turn, give the investors interest in the form of gold grams.

With the fintech app Gullak, digitising this process, gold leasing has become one of the high returns investment assets available to retail investors. Investors can buy digital gold on the platform and then lease it out to verified jewellers that give 5% extra gold on top of the leased gold. Considering gold’s historical returns of 11% per annum, the extra 5% makes gold leasing a 16% investment vehicle. All the jewellers on the app are verified by Augmont, one of India’s biggest gold refineries and provide a 100% bank guarantee on the leased gold to ensure the security of the investment.

Gold leasing vs SGB

But which is the better gold investment option, gold leasing or SGBs? 21st-century investors generally consider SGBs as their favourite gold investment asset. To clarify this question, in the next section, we will compare gold leasing vs SGBs based on various queries that investors might have.

1. Which gives higher returns?

While both SGBs and gold leasing give extra returns on top of gold price appreciation, SGB gives 2.5% extra returns, and gold leasing gives 5% extra returns.

2. What form are the extra returns in?

In SGB, you get an extra 2.5% in the form of cash (INR), while in the case of gold leasing, you get an extra 5% in the form of gold grams. So, the extra returns from gold leasing also appreciate as it is in the form of gold metal.

3. Which is more flexible?

SGBs come in with a long lock-in period of 8 yrs. Investors can sell it in secondary markets before the lock-in period but at a discounted rate of 6–8%. However, in the case of gold leasing, you can un-lease your gold at any time with apps like Gullak without penalty.

4. Which is convenient in terms of automating gold investments?

SGBs are available in tranches throughout the year, and investors can make one-time investments. In the case of gold leasing, apps like Gullak made it extremely easy to invest using daily SIPs. Investors can buy digital gold daily, and once it hits the 0.5gm mark, it automatically gets leased out.

5. Which is better in terms of interest and returns?

For SGBs, the extra returns are calculated on the principal amount(simple interest) and, on the other hand, in gold leasing, the extra returns get compounded annually.

For example, on leasing out 100gm gold, by year-end, you will have 105 gms (considering the extra 5% from gold leasing). The entire 105gm and not just 100gm(principal) will benefit from gold price appreciation.

In SGB, if you invest Rs.1,00,000, you will get the same Rs. 2,500 every year, even if the principal amount of Rs. 1,00,000 has appreciated to Rs. 12,00,000 in the following year. Your interest remains flat over the years, whereas in gold leasing, your interest grows yearly.

6. Which is safer?

SGBs are RBI-backed and assure security. In the case of gold leasing, apps like Gullak give a 100% bank guarantee on the leased gold to assure the security of the investment. All the jewellers are verified by Augmont, one of India’s biggest gold refineries, and have huge turnovers.

7. Taxation on gold leasing and SGB

• Capital gains:
  – You will have to pay 20% in the case of gold leasing, which is the long-term capital gains tax applicable.
  – SGBs are tax-free. However, if you withdraw your SGB before 8 yrs, you will not be eligible for any tax benefits and will have to pay 20% on your gains.
• Interest gains are the taxes paid on interest earned as per your (investor’s) income tax slab. You will have to pay SGB and gold leasing taxes based on your income tax slab.
• After-tax returns: For SGBs, buy/sell spread and GST are not applicable. After 8 yrs, SGB can give you 244% returns. Even with 3% GST, 3% buy/sell spread, and no tax benefits, Gold leasing can give 257% returns, which is higher than SGBs.

Conclusion

In the above sections, we have analysed various data points to understand where gold leasing stands compared to SGB. Both gold leasing and SGBs provide investors with the opportunity to earn extra returns and price appreciation. Investors can choose which gold investment suits their portfolio based on risk appetite, flexibility and returns. With an extra 2.5–5%, gold might become more than just a hedge in investors’ portfolios.

Disclaimer: These are the author’s personal views. Please do your own research before investing.

This article was originally published on Blog by Tickertape on 20th January 2023.