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.
Sovereign gold bonds have given an alternative to investors who want to invest in gold but don't want the hassle associated with the physical gold purchase, especially the millennial investors.
The government introduced gold bonds in 2015 to curb gold imports in the Indian market. Since 2015, RBI has released several tranches of gold bonds in the market.
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.
- Indexation Benefits: If you try to transfer (exit) the bond before maturity, you can use indexation to lower the capital gain tax burden.
- Collateral: The paper gold bonds can double as collateral. You can use sovereign gold bonds as collateral to receive loans from banks like you take out a gold loan.
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.
Investors looking for a fixed return on their investment shall find sovereign gold bond a great alternative. These bonds are backed by the government, and hence, no chance of default, which makes them attractive to retirement planners and senior citizen investors. Additionally, it gives you a fixed income of interest semi-annually.
Other Ways To Invest In Gold
Sovereign gold bond is not the only alternative to invest in gold. Gold-backed ETFs are also great to get exposure to the yellow metal, especially if you want to add liquid assets to your portfolio. Let's look at a comparison between investing in physical gold, gold bonds, and ETFs.
|Parameters||Gold Metal||ETFs||Gold Bonds|
|Returns||Has retail value but doesn't generate any return for the investor||Return is usually less than actual gold||More than actual return on gold|
|Purity||The purity of physical gold remains questionable, especially if it is in jewellery form||Electronic form of gold and hence, high purity assured||The gold is of .999 purity and backed by the government|
|Safety||Safety remains a concern; needs high protection from theft and wear/tear||You don't have to hold the physical gold. Hence, no concern over safety||The electronic form of gold is absolutely safe|
|As collateral||Accepted as collateral for gold loan||Don't qualify as collateral||Accepted as collateral. Banks treat it as a gold loan after deciding the Loan to Value ratio|
|Liquidity||Moderately liquid||Highly liquid and tradable like stocks in the market||Liquidity remains a concern for sovereign gold bonds. Tradable after the fifth year during the special exit window. In the secondary market, sold at a discount rate because of the fewer number of buyers|
|Tenure||There is no tenure. You can hold it as long as you want, but daily wear/tear causes marginal loss in value||No fixed tenure. ETFs are traded in the exchange like stocks and indices||Gold bonds mature in eight years|
|Tax Implications||Capital gain tax levies when you sell gold jewellery, coins, or bars||LTCG applies after three years||Gold bonds are exempted from capital gain tax if redeemed on maturity after eight years. LTCG applies only on the interest-earning|
Sovereign gold bonds scheme is a new-age investment, allowing you to invest in gold without incurring market risk. It is suitable for long-term investment purposes.
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.
Frequently Asked Questions
Is Sovereign Gold Bond a good investment?
If you are considering investment in gold then SGBs are a superior alternative to hoarding physical gold. SGBs offer a haven to investors when they want to park their investment away from market volatility. These are considered risk-free with an assured return on maturity. Traditionally, demand for SGB rises when the market goes through a period of crisis.
Is DEMAT account required for Sovereign Gold Bond?
Holding gold bonds in DEMAT format eliminates risks of losing the scrips.
A holding certificate is issued when you invest in a sovereign gold bond scheme. If you have a DEMAT, you can get direct delivery of your gold bonds to that account.
How do I redeem Sovereign Gold Bond?
You can redeem the gold bond upon maturity. You can receive the interest and redemption price directly into your bank account.
The redemption price is the simple average of the closing value of gold of 999 purity for three working days before the day of redemption as published by the Bullion and Jewellers Association Ltd. The redemption value is calculated in Indian rupees.
What is the maturity term of sovereign gold bonds?
The maturity period of the SGB bonds is eight years. But these bonds can be traded in the exchanges within a particular date. You can sell the SGB gold bonds in National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) after five years.
Are sovereign gold bonds tax free?
The redemption value is tax-free when redeemed after eight years. But the interest earned on SGB is subjected to tax at the peak rate as per your income tax bracket, meaning if you fall under the 30 percent tax bracket the interest from SGB will be taxed at the same rate.
Since there is no TDS calculated, investors must declare their income from sovereign bonds while filing for tax return.
However, if the SGB is exited before the maturity date, after five years when the early redemption opens and sold at the stock exchange, it will attract capital gain tax on the traded value. The investor can pay long term capital gain tax at a flat rate of 10 percent or 20 percent after indexation.
What is the benefit of Sovereign Gold Bond?
SGBs offer a superior alternative to investing in physical gold. These are also safe investment instruments since the government of India backs the gold bonds. In addition, investors also earn 2.5 percent interest in SGB bonds.
Advantages of sovereign gold bonds are,
- Safety: It doesn’t carry the risks associated with storing physical gold. In bonds received in digitised form, you can also avoid the risk of losing the scrip.
- Indexation benefit: You can get indexation benefit if you redeem your bond before maturity.
- Tax benefit: SGB redeemed on maturity is exempted from capital gain taxes. Tax is applied only on the interest you earned.
- Tradability: You can trade these bonds in the stock exchanges within a specific date; for instance, after five-years from issue date, these bonds become tradable in NSE and BSE.
- Collateral: You can use these bonds as collateral against a loan.
How do I sell Sovereign Gold Bond?
Selling or early redemption is allowed under the sovereign gold bond scheme. If you want to exit the bond before the maturity period of eight years, you can do that by selling those in stocks exchanges. The selling price of the SGB will depend upon the supply of gold bonds in the stock market, and the price of gold on the day of trading.
However, early exchange of sovereign gold bond attracts long-term capital gain tax at the rate of 10 percent or 20 percent with indexation.
What happens to SGB after maturity?
You redeem the bond after eight years. SGB doesn’t attract any capital gain tax on redemption after eight years. However, this benefit is available only to individual investors.
Suppose you have bought SGB at the rate of Rs 4600 per gram and redeemed it after eight years at Rs 6700. Your capital gain from the transaction Rs 2100 is exempted from capital gain tax.
- The investor is informed one month before the date of redemption
- On the date of redemption, the value will get credited to your bank account
- If there is any change in the bank account or email address details, you should intimate the concerning bank/SHCIL/PO upfront.
How do I withdraw Sovereign Gold Bond?
You can redeem a gold bond on maturity after eight years or opt for early redemption after five years. In both cases, you would need to approach the bank, SHCIL, or Post Office from where you have purchased the bond to redeem. If you are withdrawing at maturity, you will be intimated one month prior regarding ensuing maturity. On the date, the amount, redemption value plus interest, will get credited to your account.