Sovereign Gold Bonds: From advantages to eligibility; all you need to know
SGBs serve as an alternative to physical gold and other investment instruments like gold ETFs, offering investors a way to diversify their portfolios and gain exposure to the value of gold while earning interest.
Sovereign Gold Bonds (SGBs) are a unique investment avenue that combines the attributes of gold with the convenience of bonds. These bonds are issued by the Reserve Bank of India, aiming to provide individuals with an opportunity to invest in gold without physically owning it.
Introduced in 2015, SGBs serve as an alternative to physical gold and other investment instruments like gold ETFs, offering investors an avenue to diversify their portfolios and gain exposure to the value of gold while earning interest.
Here is everything you need to know about the Sovereign Gold Bond, it comes with several distinctive features that set them apart from traditional investment options.
Government backing
SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India, ensuring the credibility and security of the investment. SGB are government securities denominated in grams of gold. They are substitutes for holding physical gold.
Who is eligible?
Only resident individuals, Hindu Undivided Families, trusts, universities, and charitable institutions can buy SGBs subject to a maximum of 4KG for individuals and HUFs and 20KG for others. The limits are for a financial year.
How to buy it?
SGBs can be bought online through your demat account or offline. There is a discount of ₹50 if you buy it online. You can buy it online in demat as well as certificate mode. It must be bought through authorised selling agencies only.
Tenure of SGB
The tenure is for 8 years from the date of issue. Interest is paid on the issue price on a half-yearly basis. This interest is paid in cash to your bank account. Interest Income is taxed at marginal rate of taxation i.e. at individual slab rates. However, TDS is not deducted.
Advantages of investing in SGBs
Interest payment: Sovereign Gold Bond will yield 2.5% interest, paid semi-annually, on the issue price. There is no making charges or GST.
Storage costs: Except for the annual maintenance charges in case it is held in demat mode, there are no storage costs involved. It’s zero for physical certificates.
No issue of purity: In buying physical gold, there is always the probability of impurities. In Sovereign Gold Bond, there is no physical gold involved, only the guarantee of the Reserve Bank of India and the Government of India to honour the gold price on redemption.
No tracking error: Gold ETFs and Gold Funds try to replicate the returns of physical gold, but due to expense ratio and inflow and outflow of funds, they end up making slightly less return. No such issue with SGBs.
How is the price of an SGB issue determined?
The pricing is based on the last 3 days average price quoting on IBJA (Indian Bullion & Jewellers Association Limited). The price at the time of redemption is determined based on a similar mechanism.
Taxation: The interest earned from SGBs is subject to income tax, as per the investor's tax slab. However, the capital gains tax arising on maturity is exempt for individuals, Hindu Undivided Families (HUFs), trusts, and similar entities.
It is important to note that any redemption with RBI is tax-free. So if you do not sell these bonds in the secondary market but redeem with RBI only, gains are tax-free. However, investors have the option to exit SGBs after the 5th year of investment.
Market pricing and trading: SGBs are listed on recognized stock exchanges, enabling investors to trade them in the secondary market. The market price of these bonds is influenced by factors such as the prevailing price of gold, interest rates, and market sentiment.
Frequently Asked Questions
1. What if I am at a net loss at the time of redemption? Can I extend the maturity of the bonds?
No. You have to take the redemption amount at the time of maturity. However, you can roll forward the proceeds by buying in a fresh issue or from the secondary market.
2. Do I need to go somewhere to redeem my bonds at the time of maturity or are the funds credited automatically?
You do not have to go anywhere. Funds will be credited to the same account where your interest is paid.
3. How to convert physical bonds to demat?
You can approach your broker and request for dematerialisation. The process is the same as converting physical shares to demat.
In conclusion, Sovereign Gold Bonds bridge the gap between traditional gold investment and modern financial instruments. They offer investors the opportunity to participate in the potential appreciation of gold prices while receiving a fixed interest income.
These bonds provide flexibility, convenience, and security, making them an attractive option for diversifying one's investment portfolio. As with any investment, individuals should carefully consider their financial goals and consult with financial advisors before investing in SGBs.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
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First Published:29 Nov 2023, 09:05 AM IST
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