A Sovereign Gold Bond (SGB) is a government security denominated in grams of gold. You don’t hold physical metal — you hold a bond whose value tracks the gold price, issued by the RBI on behalf of the government.
SGBs pay a fixed annual interest (paid out periodically) on top of any change in gold’s price — physical gold and gold ETFs don’t offer this extra interest. Held to maturity (typically 8 years, with an exit window from year 5), capital gains have historically been tax-exempt for individual investors, though rules can change.
The trade-off is liquidity: SGBs are less liquid than gold ETFs before maturity, and new tranches are only issued in specific windows through the year rather than being available to buy any day.