All You Need To Know About Sovereign Gold Bonds (SGB)

5 min read

Indians are obsessed with Gold!! Be it any festival ranging from Raksha Bandhan to Diwali, a considerable population of Indians never miss an opportunity to buy gold!!

Indians purchase almost 700-800 tonnes annually and this craze seems to be never-ending.

As we all know, very little gold is produced in India and most of it is imported. On the one hand where we are focusing more on exporting in order to increase our Foreign Exchange Reserve, importing gold is causing pain to the government policy. This resulted in the introduction of Sovereign Gold Bonds in 2015, an alternative to the traditional physical gold (also check out our previous post on different forms of gold investment in India).

Understanding SGB

Sovereign Gold Bonds (SGBs) are government securities, which are denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash, and the bonds will be redeemed in cash on maturity. The Reserve Bank of India issues the bond on behalf of the Government of India .

The quantity of gold for which the investor pays is protected, as the investor receives the market price of gold on redemption. The SGB offers a superior alternative to holding gold in physical form.

The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewelry form. The bonds are held in the books of the RBI or in Demat form eliminating the risk of loss of scrip, etc. 

The purpose behind SGB

SGB belongs to the debt fund category. It not only brought down the demand for real gold, but could also track import-export of the same. There is transparency about this product as it comes under the purview of RBI. The SGB is very useful for people who are looking at gold as an investment. There is no fear of theft, no holding charges and fully backed by the government of India. You don’t even have to hire a bank locker. Value of the SGB is denominated in multiples of gold grams and thus emerges as a substitute for investing in physical gold as the quantity remains the same. You can buy these SGBs through your broker, you can buy it online through net banking or you can also buy it from designated offices. Therefore, people who have a penchant for gold investments can consider sovereign gold bonds. The expense of buying or selling the SGB is nominal in comparison to physical gold.

Who all can Invest in the Sovereign Gold Bond Scheme?

The Sovereign Gold Bonds may be held by a Trust, HUFs, Charitable Institution, University or by a person resident in India, being an individual, in his capacity as such individual, or on behalf of a minor child, or jointly with any other individual. An individual investor whose residential status subsequently changes from resident to non-resident may continue to hold SGB till the original term of redemption/maturity.

SGB Interest Rate

The bonds bear interest at the rate of 2.50% (FY 22-23) per annum on the nominal value of the bond. Interest will be credited semi-annually to the bank account of the investor, and the last interest will be payable on maturity along with the principal.

SGB Limit of Investment

The Bonds are issued in denominations of 1gm of gold and multiples thereof. The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, and 20 kg for trusts and similar entities.

In the case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed under different tranches during initial issuance by the Government and those purchased from the secondary market. The limit on investment will not include the holdings as collateral by banks and other Financial Institutions.

Price of Bond

The nominal value of Gold Bonds shall be in Indian Rupees fixed on the basis of a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period.

The issue price of the Gold Bonds will be Rs 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.

SGB as Collateral

Another benefit of purchasing SGBs is that they can be used as a collateral against loans. When institutions approve SGBs as collateral, it not only reduces the overall cost of the credit but also works as an incentive for individuals who otherwise buy physical gold with the objective of it working as a support in difficult times.

SGB Maturity

The gold bonds will mature on the expiration of 8 years from the date of issue of the bonds. On maturity, the Gold Bonds shall be redeemed in Indian Rupees, and the redemption price shall be based on the simple average of the closing price of gold of 999 purity of previous three working days, published by the India Bullion and Jewelers Association Limited.

Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond. The date of maturity of the bond shall be informed by the RBI/depository one month in advance.

SGB Premature redemption

Though the tenor of the bond is 8 years, early encashment/redemption of the Bond is allowed after the fifth year from the date of issue of the bonds. Repayment of such early encashment/redemption will be made on the next interest payment date. The bond will be tradable on Exchanges if held in Demat form. It can also be transferred to any other eligible investor.

Tax Implications on SGBs

The interest received on the sovereign gold bond shall be chargeable to tax under the head of other sources and taxed as per the tax rates applicable in case of an assessee. However, any payment of interest on SGBs would not attract any TDS as they are Government Securities. Thus, investors would receive the full amount of interest on SGBs in their bank accounts.

SGB’s are exempted from capital gains in case of holding from issue to maturity.

 Benefits of Investing in SGBs

  • SGB is a good option for investors who wish to buy gold only for the purpose of investment. SGBs ensure the quality of gold is protected and investors are secured against risk.
  • They are also able to save on the cost of storing physical gold as these bonds are in a digital form and are kept in an investor’s demat account.
  • The 2.5% interest makes this option attractive because unlike physical gold, investors earn a passive income on their gold, which is directly credited to the bondholders’ accounts.
  • These bonds make for good market-linked gifts.
  • The capital gain on the maturity amount of these bonds is completely tax exempt making them attractive for long-term investors.

Risks Involved in Buying SGBs

  • There is a risk of loss if the market price of gold falls below its cost price. This is not a specific risk with the SGB form of gold investment but is also applicable to the general form of investment.
  • However, the RBI assures that the investor will never lose in terms of the quantity of gold that was allotted to them.

SGB over Physical Gold

Here are the four key reasons why you should choose an RBI Sovereign Gold Bond over purchasing physical gold:

  1. Get the Same Amount of Gold at a Lower Price

The price of gold is fixed and regulated by the IBJA (Indian Bullion and Jewelers Association) and is usually the same for all. But, when you purchase physical gold, you also pay a high cost of craftsmanship, over and above the gold price. There is no craftsmanship element when you choose a sovereign gold bond. Thus, the total price at which you buy an SGB is lower than physical gold ornaments.   

  1. Earn Fixed Interest Over and Above the Non-Taxable Appreciating Gold Price

When you purchase physical gold, you only earn when the gold appreciates. Such is not the case with an SGB. Here, you earn through two components – one being the appreciation of gold itself, and the second is the interest rate you receive on SGBs. On Maturity, you receive tax-free appreciated gold value along with non-cumulative interest earned over the years. Only the non-cumulative interest component is taxable.

  1. Rid Yourself of Gold Storage Woes

It is no secret that storing your gold safely is entirely your responsibility. Individuals pay for lockers or private safes at various financial institutions. Since an SGB is a paper document, you don’t have to worry about storing it in a safe place. In fact, if you misplace your SGB documents, you can simply reach out to RBI and request a copy.

  1. Receive a Sovereign Guarantee

Since RBI issues SGBs on behalf of the Government of India, they come with a sovereign guarantee on payment of interests and principal repayment. Simply put, the Government assures that you will get your dues back without delay on maturity. The sovereign guarantee makes an SGB one of the safest ways to invest in gold.

To Sum Up

Nurture your wealth by adding SGBs to your financial portfolio. If you need guidance before purchasing these bonds, turn to one of India’s leading financial institutions Share India. We extend a wide spectrum of bespoke investment management services fitting your financial objectives. 

Disclaimer: Any Advice or information in the post is general advice for education purpose only and is not responsible for generating any trading profits for anyone, please do not trade or invest based solely on this information

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