SOVEREIGN GOLD BOND (SGB) SCHEME
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"Always invest in gold", our elders have taught us. It pays off well, they said, and they are right.
In India, people have traditionally invested in gold, especially since many cultures consider this yellow metal precious. So if you are planning to invest in it, "Go right ahead", we say!
In fact, why buy chunky jewellery and worry about safekeeping when you can invest in a sovereign gold bond (SGB)? It’s less risky, it’s convenient, and you don’t have to worry about storage.
The sovereign gold bond scheme is a Government of India undertaking that allows you to purchase gold on paper. In simple terms, this scheme is a substitute for holding physical gold, says the Reserve Bank of India. So, you will be purchasing gold in kilograms but not holding on to the metal physically. Investors have to pay for the purchase in cash, and the bonds will be redeemed in cash upon maturity.
Benefits of sovereign gold bond
So why should you buy an SGB instead of buying actual gold?
- No storage risks and costs: If you purchase gold jewellery, you end up worrying about its safekeeping. You may even have to pay for storage in a bank locker. With this type of bond, the risks and costs of storage are eliminated.
- Low risk: The RBI issues these bonds on behalf of the government. Which also means that the Central government backs the scheme. That makes these bonds safer than purchasing actual gold.
- Payment in market price: When you withdraw your bond, either upon maturity or prematurely, you get the current market price. Investors are assured of the market value of gold at the time of maturity and periodical interest, says the RBI.
- No making charges: When you buy gold jewellery, you pay making charges that you may not be able to redeem upon resale. But with SGB, you need not worry about the making charges or the purity of the gold.
- No tax on capital gains: The government of India has exempted the tax on capital gains for purchase of gold if you invest in a sovereign gold bond. Interests earned, however, will be taxable.
Features of sovereign gold bonds
There are some features unique to the sovereign gold scheme, as prescribed by the RBI.
- Denomination: SGB bonds can be purchased in grams or kilograms of gold only. You have to buy at least one gram of gold to avail of this scheme. There are also restrictions to the upper limit. One can hold a maximum SGB worth 4kg only. If it’s a trust, it can hold 20 kg worth.
- Interest rate: Interest will be paid to you twice a year on the amount of your initial investment and the RBI determines this rate.
- Eligibility: Only Indian nationals and Hindu Unified Families can hold these bonds.
- Tenure: Usually, this bond matures at eight years. You will have an option to withdraw prematurely after the fifth year.
- Redemption: Upon maturity, the sovereign gold bonds will be redeemed and given to you in cash. The price of redemption shall be based on the simple average of the closing price of gold of 999 purity of previous three business days from the date of repayment, published by the India Bullion and Jewelers Association Limited, the RBI says.
So if you are planning to invest in gold this festive season, we advise you to go for the sovereign gold bond scheme. It is safe, hassle-free and gives you more benefits. You can also gift this bond to your friends and family, as long as they satisfy the eligibility criteria. You can even invest in an SGB on behalf of your child, so your child can reap the benefits.