Fifth series of the sovereign gold bond (SGB) in the year 2018-19 is open for investment from 14 January and will remain open till 18 January 2019.
It’s a good option for investors looking to invest in gold. They can do so both by filling up physical form or online. Let’s have a look at what’s on offer.
Indians are among the largest purchaser of gold and they buy it both for consumption and investments. However, in order to curb the demand of physical gold for investment, which is considered as unproductive asset, government introduced SGB in 2015.
The intention was to mobilise finances and reduce the economic strains caused by imports of physical gold and reduce the Current Account Deficit (CAD).
Under the scheme, each bond is equivalent to one gram of gold. Minimum investment is kept at 1 grams and the maximum limit of investment is up to 4 kg per fiscal. Price of the bond is fixed in Indian rupees on the basis of the closing price for gold of 999 purity during the last three business days of the week preceding the subscription period. In the current issue, the price works out to be ₹ 3,214 per gram or per bond.
However, government has decided to offer a discount of ₹ 50 per gram to those investors applying online and the payment is made through digital mode. For such investors, the issue price of each gold bond will be ₹ 3,164.
In addition to the appreciation in value of gold, the scheme also offers an interest of 2.5% per annum. Remember that there is a lock-in period of eight years from the date of investment, but one can make a pre-mature redemption on the interest payment dates, from fifth year of the date of issue.
While interest received on the bonds are taxable, capital gains made at the time of maturity are exempt from tax. Investors can take indexation benefits while calculating long term capital gains if pre-mature withdrawal are made.
Should you invest?
If you intend to buy gold for investment, SGB is certainly a better option compared to physical gold or even exchange traded fund (ETFs). Transaction charges in physical gold like jewellery can go as high as 25-30% (including making charges), whereas in case of gold bars and coins, it can be as high as 13%-15%.
Even in case of ETFs, expense ratio can vary between 0.9% and 1.1% per annum. But in case of SGB, transaction cost are lower than other options of investment in gold. Besides that it provides additional interest of 2.5% per annum and capital gains at the time of maturity are exempt from tax .
However, as per financial planners, gold investment works well for hedging, and should not be more than 5-10% of your total portfolio.