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Sovereign Gold Bonds – It’s Gold, Just Better

Updated: Aug 17, 2023


Gold has not lost its sheen as an investment product over the years, especially in India. The yellow metal is popular compared to other more valuable counterparts owing to its acceptability across the world. Let us discuss about a convenient way to invest in gold without the hassles of maintaining physical gold.


Yes, we are talking about the Sovereign Gold Bonds (SGBs) which is gaining popularity among Indian investors.

Table of Contents

1

What is an SGB

2

Why should one invest in gold?

3

Who can invest in SGB?

4

How much can one invest?

5

What is the mode of application and payment?

6

What if you miss the primary issue?

7

How to redeem/sell the SGBs?

8

How are SGBs taxed?

9

What are the advantages of SGBs?

10

What are the disadvantages of SGBs?

11

Comparison between SGBs, physical gold and gold ETFs



1. What is an SGB?

A Sovereign Gold Bond (SGB or bond) is a government security issued by the Reserve Bank of India (RBI) on behalf of the Central Government. It is considered a safe investment because it carries the Sovereign Guarantee of Govt of India (in this case, the promise of Central Govt to pay the investors the value of their investments).


The government launched this product to reduce the dependence on physical gold. These bonds carry an interest rate of 2.5% on your initial investment, which is paid semi-annually.


The maturity period of the bonds is 8 years. If purchased from the primary market (when issued by the RBI, also called primary issuance), the lock-in-period of the bonds is 5 years, post which it can be sold or transferred. The 5-year lock-in is not applicable if purchased from the secondary market (or stock exchanges).


The first tranche of SGB was issued in the financial year 2015-16. From time to time, RBI notifies the investor community about every upcoming issue along with the issue price (price per gram in INR).


Why should one invest in gold?

It is always wise to make your investment portfolio as diverse as possible with a variety of investment products. This is because all asset classes need not behave the same way at all times. While a certain asset class underperforms, gains in other assets can make up for the losses.


Having said that, gold is a major asset class investors should definitely consider. During times of political and economic uncertainties, gold is considered as a safe investment when compared to other asset classes.


Who can invest in SGB?

Indian residents including individuals, HUFs, universities, trusts and charitable institutions are eligible to invest in SGBs. If an individual investor becomes an NRI at a later stage, he/she can hold the bonds till redemption (sale of the units) or maturity. Minors can invest in SGBs by making an application on his/her behalf by the legal guardian. The scheme also allows for joint holding of the bonds.


How much can one invest?

SGBs are issued in one gram of gold and in its multiples. Minimum investment for any category of investors is 1 gm. In a particular fiscal year (ie, period from April – March), the maximum investment for individuals & HUFs is 4 kg and for trusts & similar entities is 20 kg.


In the case of joint holding, the limit applies to the first applicant. This maximum limit applies to investments made through primary and secondary market. Please note, the ceiling is not applicable to the bonds held as collateral with banks or financial institutions.


What is the mode of application and payment?

The primary issue of SGBs happen through the branches of listed scheduled commercial banks, designated post offices, Stock Holding Corporation of India Ltd. (SHCIL), Clearing Corporation of India Limited (CCIL) and the authorised stock exchanges either directly or through their agents or brokers. An application can be made online as well through websites of entities designated by the RBI.


The payment can be made by cash (upto Rs. 20,000), demand draft, cheque or electronic mode. When the application and payment is through digital mode, the investors can avail a discount of Rs. 50 per gram.


What if you miss the primary issue?

As already mentioned, RBI issues the SGBs at specified time periods. If an investor misses this window, he/she can still purchase the SGBs from the secondary market (ie, stock exchanges) through brokers. For this, the investor requires a trading and demat account. The bonds are available in the secondary market after completing the lock-in period of 5 years. Hence, an investor buying via this channel can sell the units at any point of time.


Moreover, the SGBs are not on huge demand in the stock exchanges. Due to this reduced demand, one can buy the SGB at a discount to the market price of gold or issue price.


How to redeem/sell the SGBs?

After holding the bonds till maturity, ie 8 years, the proceeds (redemption value and interest) will be deposited to the registered bank account of the investor.


For early redemption (after 5 years), investors should approach the designated entity through which the purchase was made 30 days prior to the interest payment date with the redemption request. Such redemptions dates will be notified by the RBI.


The value of gold at redemption is arrived at by calculating the simple average value of the closing price of 999 purity gold, published by the India Bullion and Jewellers Association Limited, for the last 3 business days of the week before the date of redemption.


If the bonds are in electronic form, after the lock-in period, they can be sold in exchanges through stock brokers or transferred to a third person using Delivery Instruction Slips (DIS).


How are SGBs taxed?

Tax on purchase: There is no TDS or GST charged during the purchase.


Tax on interest: The interest received on SGBs comes under ‘Income from Other Sources’ and is taxed as per the applicable tax rate.


Held till maturity: The capital gains (Sale Price - Purchase Price) arising from redemption after maturity is tax exempted.


Redemption before 3 years: If the units are sold within an year of purchase, then the Short Term Capital Gains (STCG) are taxed as per the income tax slab.


Redemption after 3 years: In this case, the capital gains are taxed at a flat 10% without indexation benefits or 20% with indexation benefits (after incorporating inflation effect).


What are the advantages of SGBs?

  • Safety – Unlike physical gold, there is no risk of theft or wear & tear

  • Additional income – SGBs fetches an annual interest at the rate of 2.5%

  • Tradability on exchanges – It is easy to buy and sell the bonds since they are traded on exchanges. This is possible only after 5 years (for purchase made via primary issuance), but those purchased from exchanges can be sold anytime.

  • Collateral – The bonds can be used as collateral for availing loans.

  • Purity issues – Unlike physical gold, the purity of these bonds are never questioned.

What are the disadvantages of SGBs?

  • Lock in period – One cannot exit the investment within the lock in period of 5 years.

  • Sale through secondary market – The demand for SGBs are comparatively lower in the secondary market and one may have to sell the units at a discount to market price.

  • Tax – If sold before maturity, the capital gains attract LTCG taxes. Moreover, the interest earned are taxed at individual tax slabs

Comparison between SGBs, Physical Gold and Gold ETFs

Particulars

SGB

Physical gold

Gold ETFs

Ownership

In the form of bonds

(Electronic and paper form)


In physical form

ETF units (Electronic and paper form)

Trading & Liquidity

Traded on stock exchanges but less liquid than ETFs

Not traded and least liquid

Traded on stock exchanges and highly liquid

Pricing

Linked to market price of gold

Linked to market price of gold

Linked to market price of gold

Cost and fees

Nominal issuance charge

Storage, insurance and transaction costs

Low expense ratio. Brokerage and transaction costs when traded.

Taxation

Interest taxed as per individual tax slab. Capital gain tax on sale before maturity

Capital gain tax on sale. Wealth tax may apply

Capital gains tax on sale

Risk

Low risk

High risk, prone to theft and damage

​Low risk


Final thoughts

SGBs are a convenient and attractive financial product to invest in gold if you are looking to diversify your portfolio. After evaluating the requirements of your portfolio, the amount and mode of investment can be determined.


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If you are still on the fence about investing in Sovereign Gold Bonds, we suggest to speak to an Ambrela expert to clarify your queries.



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