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Investing in Sovereign Gold Bonds -What You Need to Know

By Aspero

  • November 8, 2023
  • 7 min read

Gold, the “yellow metal,” has an eternal appeal, with its status as a symbol of prosperity and auspiciousness deeply ingrained in Indian culture. While physical gold is treasured in many Indian households, it comes with its set of challenges, including storage costs and theft risks. Additionally, traditional gold investments yield no returns, and their price appreciation has been relatively modest over the years.

In response to these challenges and to make gold investments more accessible, India introduced an alternative avenue for its citizens – Sovereign Gold Bonds (SGBs). These government-backed securities allow you to invest in gold without the need for physical possession, providing interest on your investment as an added incentive.

Demystifying Investment in Sovereign Gold Bonds: A Government-Backed Initiative

Sovereign Gold Bonds, issued by the Reserve Bank of India (RBI) on behalf of the Government of India, are a convenient form of gold investment. They are essentially gold-backed by the government’s guarantee which can be owned in digital or paper form and not in the physical form. This means you do not get to buy any physical gold in terms of a biscuit or gold jewellery that you can use/wear or keep in your bank account.
Here’s a closer look at some of the key functions and benefits of investing in SGB:

1. Tenure and Returns: 

SGBs typically have an 8-year tenor, but they offer an option to exit after 5 years. They yield an annual interest of 2.5% on the face value of the bonds, paid semi-annually. This means you receive two interest payments of 1.25% each year.

2. Tax Benefits as per Income Tax Act: 

One of the notable advantages of an SGB is its tax efficiency. According to the Income Tax Act, STCG tax is levied at the applicable income tax slab rate and LTCG tax at 20% with indexation benefit (in case of premature redemption). However, if the bond holder holds them until maturity (i.e., the full 8 years), any capital gains you accrue are exempt from capital gains tax.

3. Liquidity and Tradeability: 

An SGB is not locked away for years on end. They have an initial lock-in period of five years, after which it can be redeemed prematurely. It can also be sold or traded on stock exchanges prior to that. This feature provides liquidity and flexibility that traditional physical gold ownership can’t match. The redemption price is also dependent on the marketing trends.

4. Hedge Against Uncertainty: Taking advantage of government securities

Gold has a longstanding reputation as a hedge against inflation and economic turbulence. During times of financial instability, gold often serves as a safe haven, shielding portfolios from economic storms. You can invest in sovereign gold easily by tapping into the protective power of gold without the worries of physical ownership.

5. Loan Facility: 

SGBs can also be used as collateral to secure loans from scheduled financial institutions, as stipulated by the Reserve Bank of India’s Loan-to-Value (LTV) regulations. This provides additional financial flexibility to investors.

Investing in a sovereign gold bond: an example

Allow us to further simplify the functioning with the help of an example:
Suppose you are an investor looking to diversify your portfolio and invest in gold. You decide to invest in sovereign gold bonds. At the time of your investment, the price of gold is Rs. 5,000 per gram, and you decide to invest Rs. 50,000.

Step 1: Initial investment – You invest Rs. 50,000 in SGB, which means you are essentially purchasing 10 grams of gold (Rs. 50,000 ÷ Rs. 5,000 per gram). These 10 grams of gold are represented by the SGB.

Step 2: Interest Earnings –  A sovereign gold bond offers a fixed annual interest rate, which is currently set at 2.50%. This interest is paid semi-annually, which means you’ll receive two interest payments each year.

In this scenario, your sovereign gold bonds would earn an annual interest of 2.50% on your investment amount, which is Rs. 50,000. So, each year, you would earn an interest of Rs. 1,250 (2.50% of Rs. 50,000).

Step 3: Maturity, Closing Price and Capital Appreciation – A sovereign gold bond typically has a maturity period of 8 years. However, you have the option to exit your investment after the 5th year. At the time of maturity, the bonds are redeemed at the prevailing market price of gold.

Let’s assume that, over the 8-year period, the ongoing market price of gold has appreciated to Rs. 6,000 per gram. This means the market value of your 10 grams of gold represented by the SGB is now Rs. 60,000 (10 grams x Rs. 6,000 per gram). As a result, upon maturity, your investment would be worth Indian rupees (INR) 60,000.

Who Can Invest in SGBs?

Sovereign Gold Bonds are open to Indian residents under the Foreign Exchange Management Act, 1999, and eligible investors include Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. Even if an investor’s residence status changes from resident to non-resident, they can continue to hold a sovereign gold bond until early redemption or maturity.

Investing in Sovereign Gold Bond: It’s Easier Than You Think

Investing in SGBs is straightforward. You can purchase them offline from nationalized banks, designated post offices, scheduled foreign banks, scheduled private banks, or Stock Holding Corporation of India (SHCIL) offices. Alternatively, you can opt for the convenience of internet banking and online platforms like Aspero to invest in SGBs securely. The government even provides a discount of Rs. 50 per gram to encourage online transactions. You might need a Demat account to make an online investment in sovereign gold.

Investing in SGB vs keeping money in your bank account 

As you already know, investing in SGB in India requires an initial investment in gold, with a minimum of one gram, and offers tax benefits under the Income Tax Act. The capital gains are exempt from bonds bear interest that is exempt from income tax, while capital gains tax is also exempt if the bonds are held until maturity.

On the other hand, keeping money in a bank account doesn’t involve investing in India bullion or gold. While it provides liquidity and safety, the interest earned in a bank account is generally taxable. Meaning it is subjected to capital gains tax arising.

A typical savings account’s interest rate per annum is approximately 2.5 – 3% which considering your tax bracket would be further slashed by 30%. This means that the effective return on keeping money in savings is lower irrespective of the capital appreciation you can get with gold.

Your choice between SGBs and a bank account should align with your financial goals and risk tolerance.

In Conclusion: SGBs – A Brilliant Way to Invest in Gold

Sovereign Gold Bonds offer a compelling investment solution, blending the time-honoured allure of gold with government backing, interest earnings, tax benefits, and flexibility. They provide a secure, low-risk, and long-term investment option, making them a superb addition to diversified portfolios. Whether you’re a seasoned investor who has money lying around in your bank account or are new to the world of gold investments, an SGB offers a golden opportunity to unlock the potential of your wealth.

Frequently Asked Questions about SGBs

What is the Minimum and Maximum Investment limit in SGBs? 

The minimum permissible investment is one gram of gold, and the maximum subscription varies based on the type of investor. For individuals and HUFs, the maximum limit is 4 kg of gold, while charitable institutions and trusts can purchase up to 20 kg of gold.

How is the Selling Price of SGBs decided? 

The selling price of an SGB is determined by calculating the simple average of the closing price of gold of 999 purity for the last three business days of the week preceding the subscription period, as published by the Indian Bullion and Jewellers Association Limited. The nominal value of these bonds is fixed in Indian Rupees.

Can I sell gold bonds anytime?

Yes, you can sell gold bonds anytime after purchasing them either from the primary or secondary market. Do note that selling SGBs will be subject to taxation based on your holding period.

Can I buy an SGB every month?

You can buy an SGB every month from the secondary market subject to their availability.

How are capital gains taxed on SGBs? 

Capital gains on SGBs are exempt if the bonds are held until maturity. However, if they are sold in the secondary market before maturity, capital gains tax may apply.

Are SGBs tradable in the secondary market? 

Yes, SGBs can be traded on stock exchanges like the NSE and BSE. This provides liquidity and flexibility to investors who wish to exit their investments before maturity.