Gold, as a precious metal, doesn’t just carry economic weight in India. It is deeply rooted in our cultural heritage and rituals. Gifting gold, to women especially, has for long been used as an alternative investment strategy to provide financial security. Wealth has been passed down in families for generations in the form of physical gold, considered a safe and durable investment instrument. As time has passed, the focus has shifted from the physical value of gold to unlocking its intrinsic value through other forms of security. Millennials and young investors no longer see gold jewellery, coins, bullion or any physical form of gold as long term wealth generating assets when compared with equities or other fixed return savings instruments.
If you want to invest in gold but don’t want to physically own it, Sovereign Gold Bonds are the ideal investment avenue for you. Introduced by the Government of India in November 2015, Sovereign Gold Bonds are a government-backed gold bond scheme denominated in multiple grams of gold. Gold jewellery is no longer considered a lucrative asset considering 15-20% of its value goes towards making charges. To provide a low-risk opportunity for retail investors to enter the gold market, the Government of India introduced Sovereign Gold Bonds. The gold bonds come with a sovereign guarantee on capital invested. In this case the Government of India is the sovereign. It is a safe investment instrument offering potentially higher returns on your capital than physical forms of gold. They can be held in your demat account or in the form of physical holding certificates.
Here are some reasons to invest in Sovereign Gold Bonds
They are an affordable, safe and tax efficient alternative to holding physical gold as an investment
– They earn a fixed interest (2.50% as of now) while physical gold relies solely on capital appreciation.
– Your investment is safeguarded by the Government of India.
– Gold does not create wealth in the long term, but it is a good way to hedge against market fluctuations, inflation, political upheavals, etc.
– Sovereign Gold Bonds are more tax efficient than physical gold. Gold falls under the class of non-financial asset which means proceeds from sale of gold under three years will attract short term capital gains tax. Gold sold after 3 years will attract long term capital gains tax at 10% without indexation and 20% with benefit of indexation. Sovereign Gold Bondson the other hand are completely tax-free upon redemption. Interest on Sovereign Gold Bonds are taxable according to the tax slab you fall under. If Sovereign Gold Bonds are sold in the secondary market they attract capital gains tax at extant rates.
– Sovereign Gold Bonds guarantee principal redemption and interest payments backed by the Government of India. Additionally, you stand to earn from the appreciation of gold prices. Annual interest ensures that you are protected against any inflation risk.
Fast Facts about Sovereign Gold Bonds
Before you invest in gold bonds, it is important to know the fundamentals of how sovereign gold bonds work.
– Individuals and entities can invest in Sovereign Gold Bonds.Individuals, trusts, HUFs, charitable institutions and universities can invest in Sovereign Gold Bonds. Investments can also be made on behalf of a minor as well.
– The minimum initial investment is 1 gm of gold capped at 4 kg of gold per investor (individual and HUF) for trusts 20 kg of gold is permissible.
– The tenure of maturity is 8 years, but investors can exit from the 5th year onwards on interest payout dates.
– Interest rate payable is 2.5% payable semi-annually.
– Sovereign Gold Bonds are held in physical form and can be converted to demat form. The bonds are issued against multiples of 1 gm of gold.
– The bonds are sold through commercial banks, Stock Holding Corporations of India Limited, National Stock Exchange of India Limited, Bombay Stock Exchange Limited and designated post offices (as notified from time to time).
– The bonds can also be purchased online through netbanking. All the formalities including nomination details and KYC can be completed online through your netbanking account.
– The price of Sovereign Gold Bonds is calculated on the basis of a simple average of the closing price of gold of 999 purity, declared by the India Bullion and Jewellers Association Limited on the last three working days of the week preceding the subscription period.
– The KYC documents required will be the same as the purchase of physical gold. Voter ID pan card or Tan card and passport are required.
– The Department of Economic Affairs has declared that in the year 2021, 6 tranches of Sovereign Gold Bonds will be issues from May to September 2021
It is important to note that gold investments should constitute only 5-10% of your investment portfolio. You should benefit from the capital appreciation of gold but the movement of prices of gold is often unpredictable and doesn’t offer a high enough return to channel all your savings into. Gold investments buttress your portfolio in time of geopolitical instability, a global health crisis, war or any other type of economic unpredictability. Gold bonds have the benefits of owning physical gold, such as their use as collateral for loans and capital appreciation without expenses such as storage costs, long term capital gains tax (if redeemed after 8 year maturity period) and the flexible to trade freely on secondary markets or with the government (after the 5th year).