Sovereign Gold Bonds- SGBs
Sovereign Gold Bond Scheme was launched by the Government of India in November 2015. The Sovereign Gold Bonds are issued by the RBI on behalf of the Indian Government. The bonds are substitutes for physical gold.
What are Sovereign Gold Bonds?
Sovereign Gold Bonds(SGBs) are government securities that are valued in terms of gold. In simple terms, they are perfect substitutes for physical gold. As SGBs are issued by the RBI on behalf of the government, they are perfectly safe as the risk of default is extremely low.
Under the scheme, the bonds are made open for subscription in parts known as tranches by RBI. SGBs offer you a fixed 2.5% annual interest, which is paid semi-annually. This allows you to earn capital gains as well as fixed interest. The issuance of the latest sovereign bonds is announced in a press release every 2-3 months by the RBI. You will have a one-week window to subscribe to this scheme.
Features of Sovereign Gold Bonds
- Eligible Investors: Any Person who is a resident of India can invest in SGBs.
- Gold Denomination: The bonds are valued in terms of gold. 1 Sovereign Gold Bond is equal to 1 Gram of Gold.
- Tenure: The bonds have a maturity period of 8 Years and you can withdraw from the scheme after 5 Years. You can sell the SGBs on the stock market before maturity at the market rate of gold.
- Tax Treatment: No tax is charged on capital gains if they are sold after 5 years. In case the bonds are sold before 5 years, capital gains tax will be applicable. However, you will receive indexation benefits against any long-term capital gains arising on the transfer of the bond. The 2.5% fixed interest you receive semi-annually is chargeable to tax as per your income tax slab. No TDS is deducted on the fixed interest.
- Min-Max Investment: The minimum investment for individuals, Hindu Undivided Family (HUF), and trusts is 1 gram. The maximum investment for HUF and individuals is 4 kg per year, while it is 20 kg per year for trusts.
- Tax Benefits: This is the biggest advantage of investing in SGBs as no tax is chargeable on Capital Gains if held till 5 Years
- Low Cost: There is no design or making charges associated with SGBs, making it cheaper than physical gold. Also, there is no GST charged while purchasing SGBs, which is not the case for the purchase of physical gold.
- Convenience: There is no risk and cost of storage involved as it is mostly in electronic form. Also, there are no impurities associated with this as present in physical gold.
- Low-Risk Investment: As the bonds are backed by the Government of India, they are one of the safest forms of investment and the risk of default is zero. The only concern for an investor would be falling gold prices, which may lead to capital gain loss.
- Good long-term return: The SGBs offer a fixed interest of 2.5% per annum paid semi-annually in addition to the capital gains after redemption. This ensures that investors get good long-term returns in comparison to physical gold.
- Hedging against Inflation and Stock Market: Gold is a precious metal that is known for offering returns to investors higher than the inflation rate in the long term. Also, when the stock market falls, gold appreciates as it is known as a safe investment. Thus, gold is a good asset for hedging against inflation and stock market fall.
- Loan Option: Sovereign gold bonds are accepted by financial institutions as collateral to obtain a loan. You can get up to 75% of the market value of bonds as a loan as per RBI’s LTV regulations. This allows you the option to use SGB as collateral for a loan when in times of need.
- Passive Investment: As funds for SGB are locked in for 5 years, you need not worry about short-term falls and check gold prices every day. The price of SGB will remain unaffected by short-term volatility.
- 5 years lock-in period: The SGBs are redeemable after 5 years. However, as the SGBs are tradable on the exchanges, you can sell them at the prevailing gold market rate. You will have to pay capital gains tax if the bonds are sold before 5 years.
- Market-related risks: Generally, gold prices are inversely related to prices in the stock market. Any rise in stock market prices will lead to a decline in gold prices as investors would move their investments to the stock market to get better returns. A prolonged period where the stock market is in the boom will lead to low returns for the SGB holders.
Who should buy Sovereign Gold Bonds?
Sovereign gold bonds are a good investment option for investors looking for assets with good returns and low risk. You can also diversify your investment with SGB and hedge against any fall in the stock market to protect your capital.
Also, SGBs are a good alternative for investors looking to purchase physical gold as an investment. This is due to the additional 2.5% fixed interest and exemption of capital gains on redemption along with many other advantages.
How to buy and sell Sovereign Gold Bonds?
You can invest in SGBs physically through banks, Post offices, or Stock Holding Corporation of India Limited (SHCIL) offices. When investing physically, you will receive a certificate for the SGB. Investments can be made online in SGBs through different stockbrokers or bank websites. Purchasing SGBs online is very easy and you get a discount of Rs.50 per gram. It also removes the need to safeguard the certificate as the bonds are stored electronically in your Demat Account.
The SGBs are openly traded in the exchanges but capital gains tax will be applicable if sold before 5 years. If you are holding SGBs in physical form and want to redeem them before maturity, you are required to approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date.