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Among the available options, Sovereign Gold Bonds are widely regarded as the most tax-efficient way to invest in gold for long-term investors
SGBs offer an annual interest of 2.5%, paid separately from the appreciation in gold prices.
Gold prices are on a remarkable upswing, delivering returns of nearly 80% over the past year. An investment of Rs 1 lakh made a year ago would today be worth around Rs 1.8 lakh, making gold one of the strongest-performing assets in the current market. Unsurprisingly, investors are increasingly turning to the yellow metal to capitalise on the rally.
However, financial experts warn that choosing the wrong mode of investment in gold can significantly erode returns, with taxes eating away 30-50% of profits in some cases. With gold investment no longer limited to jewellery, coins or bars, newer instruments such as Sovereign Gold Bonds (SGBs), Gold ETFs, gold mutual funds and digital gold have reshaped the investment landscape, offering better efficiency and, in many cases, lower tax liability.
Among the available options, Sovereign Gold Bonds are widely regarded as the most tax-efficient way to invest in gold for long-term investors. Issued by the Centre, SGBs offer an annual interest of 2.5%, paid separately from the appreciation in gold prices. The bonds have a maturity period of eight years, and the biggest advantage lies in taxation; capital gains on redemption at maturity are completely tax-free.
The annual interest income, however, is taxable as per the investor’s income tax slab. If the bonds are sold before maturity, capital gains tax applies, short-term capital gains if sold within one year, and long-term capital gains at 12.5% thereafter.
Gold ETFs and gold mutual funds are considered the next best alternatives, particularly for investors seeking liquidity and market-linked exposure without holding physical gold. In the case of Gold ETFs, gains are taxed as long-term capital gains at 12.5% if the units are sold after 12 months. For gold mutual funds, the long-term holding period is 24 months. Selling either instrument before the specified period attracts short-term capital gains tax, which is added to income and taxed according to the applicable slab, potentially as high as 30%.
Physical gold, whether in the form of jewellery, coins or bars, remains the least efficient option from a returns perspective. Investors must pay 3% GST at the time of purchase, a cost that immediately reduces effective returns. Digital gold purchases also attract the same GST. If physical or digital gold is sold after 24 months, long-term capital gains tax of 12.5% applies without the benefit of indexation. Selling before 24 months results in short-term capital gains tax as per the income tax slab.
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January 15, 2026, 17:29 IST
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