Compare these savings tools across key factors to choose one that aligns with your financial goals.
Fixed deposits and sovereign gold bonds are some of the most popular savings and investment tools in India. While FDs are trusted for their low-risk nature and assured returns, SGBs have the potential for capital appreciation with market-linked returns. You could invest in an FD issued by banks, NBFCs, or the post office. Meanwhile, SGBs are government-backed securities issued by the RBI.
Know the difference between these options to make well-informed investment decisions, whether you choose to invest in either or both.
Here are some essential differences to consider between these investment options:
Parameters |
Sovereign Gold Bond |
Fixed Deposits |
Returns |
Returns are tied to gold’s market performance |
Returns are fixed based on the interest rate decided by the bank, NBFC, or post office |
Risk |
Potential for capital loss if gold prices decline |
Low-risk investment with capital protection |
Liquidity |
Limited liquidity due to the lock-in period |
Some FDs allow premature withdrawals, but penalties may apply |
Lock-in Period |
Mandatory 5-year lock-in period |
Tax-saving FDs have a 5-year lock-in period |
Interest Payout |
Semi-annual |
At maturity or intervals of your choice (i.e. monthly, quarterly, half-yearly, or yearly) |
Senior Citizen Benefits |
All investors receive the same interest rate, regardless of age |
Some banks and NBFCs offer higher interest rates for senior citizens |
Accessibility |
Available to individuals, trusts, HUFs, universities, and charitable institutions |
Eligibility criteria vary among different banks and NBFCs |
Tax Benefits |
Tax-exempt if held until maturity |
Tax-saving FDs offer deductions of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act, 1961 |
Note: The information mentioned in the table is subject to change as per the policies of the government, bank, or NBFC.
Here are some benefits and drawbacks of investing in SGBs you must be aware of:
Pros
Fixed Interest Income: Investors earn a fixed interest rate of 2.5% p.a., paid semi-annually
Tax Benefits: No capital gains tax is imposed if the bond is held until maturity (8 years); indexation benefits apply if sold after 5 years
Security and Safety: Eliminates concerns like theft or impurity associated with physical gold
Liquidity Options: Trade SGBs on the stock exchange is available after 5 years from investment date, offering some liquidity
Cons
Market Risk: Subject market fluctuations and drops in the price of gold, resulting in lower returns
Lock-in Period: Early exit option only available after 5 years of investment, reducing flexibility
Liquidity Risk: Lacks liquidity in the secondary market, affecting their resale value
Pros and Cons of Investing in Fixed Deposits
Here are a few advantages and disadvantages of investing in FDs you should know beforehand:
Pros
Flexible Tenures: Choose from flexible tenures ranging from 7 days to 10 years
Liquidity: Certain banks and NBFCs permit premature withdrawal, subject to penalty charges
Loan Facility: Get a loan against FD and access up to 90% of the deposit value without breaking the investment
FD Insurance: FDs issued by banks are insured for up to ₹5 Lakhs per depositor by the Deposit Insurance and Credit Guarantee Corporation
Cons
Taxable Interest: Interest earned on FDs is fully taxable, including those received from tax-saver FDs
- Premature Withdrawal Penalty: Withdrawing funds from the FD, wholly or partially, may result in penalties that reduce your overall returns
Frequently Asked Questions
Can I withdraw or reinvest my FD?
Yes, you can withdraw your FD before maturity. However, certain penalties may apply. You can also reinvest the amount into a new FD.
What is a Sovereign Gold Bond (SGB)?
An SGB is a government-backed investment scheme that represents gold in grams. It offers a fixed rate of interest and allows investors to benefit from the potential appreciation in the market price of gold over time.
What are the risks associated with SGBs?
The primary risk associated with SGBs is potential capital loss due to fluctuating gold prices. The 8-year lock-in period adds to the investment's volatility.
What are the risks associated with FDs?
FDs carry risks like inflation erosion, lower returns compared to other investments, and premature withdrawal penalties, among others.
What is the liquidity aspect of SGBs and FDs?
FDs offer higher liquidity, with options for premature withdrawals, though penalties may apply. SGBs have limited liquidity due to the 8-year lock-in period, with early exit possible only after 5 years.
How do SGBs and FDs differ in terms of returns?
SGB returns are linked to gold prices and include a fixed interest rate of 2.5% p.a. FDs offer fixed returns based on the interest rate predetermined by the bank or NBFC.
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