Sovereign gold bonds or SGBs are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The gold in this bond is sold on a per unit basis such that every unit derives its value from underlying one gram gold with 999 purity. The cost is calculated by taking an average of closing prices of gold for the latest three working days preceding the subscription period. These closing prices are published by the India Bullion and JEWELLERS Association Limited (IBJAL). The redemption price is also calculated on the latest base data from the same source. SGBs are easy to buy and handle with a a term of eight years and an interest rate of 2.5% per annum paid on a half-yearly basis. Every individual purchase is restricted to a maximum of 4kgs per financial year and in case of a trust, it is restricted to 20kgs. The only document mandatory for the purchase of SGBs is a PAN card without which no investment in these bonds is permitted
KEY CONTENTS OF THIS ARTICLE:-
- How SGBs work
- Benefits of investing in SGBs
- Features of SGBs
- Who should invest in SGBs
- Features of SGBs
- Its advantage
- Bottom line
How SGBs Work:-
- SGBs are issued by the RBI in different tranches during the financial year. These securities are made available via banks, brokers, post offices and online platforms. A discount of INR 50 per gram is offered to investors who purchase them digitally to promote buying SGBs online.
- It is important to note that RBI brings new series of SGBs for sale in the market throughout the year. So, if you miss the last one announced, you can always wait for the next issue to be announced.
- Investors can either buy the bonds in physical, digital or dematerialized format. Once purchased physically, investors can get these bonds credited to their DEMAT accounts by making a specific request for it. RBI then processes the dematerialization at their end and until when, the bonds are held in RBI’s books.
- Dematerialization can also be done post allotment. Investors who are not buying directly from the RBI, can buy the units from the secondary market i.e., from stock exchanges.
Benefits of Investing in SGBs:-
SGB is a good option for investors who wish to buy gold only for the purpose of investment. SGBs ensures the quality of gold is protected and investors are secured against risk.
They are also able to save on the cost of storing physical gold as these bonds are in a digital form and are kept in an investor’s DEMAT account.
The 2.5% interest makes this option attractive because unlike physical gold, investors earn a passive income on their gold, which is directly credited to the bondholders’ accounts.
These bonds make for good market-linked gifts.
The capital gain on the maturity amount of these bonds is completely tax exempt making them attractive for long-term investors.
Who should invest in SGBs:-
- You may consider diversifying your portfolio with at least 5%-10% in gold. As a low-risk investment, it is perfect for investors with a low-risk appetite. Compared to physical gold, the cost to purchase or sell SGBs is quite low.
- The expense of buying or selling the SGB is also nominal in comparison to the physical gold.
- Those who do not want to go through the hassles of storing physical gold can also go for SGBs. This is because it is easy to store this in DEMAT form, and nobody can steal it as they are in electronic form.
Features of Sovereign Gold Bonds:-
Eligibility Criteria
Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. You may also invest on behalf of a minor.
Denomination/Value
The value of the bonds is assessed in multiples of gram(s) of gold, wherein the basic unit is 1 gram. The minimum initial investment is 1 gram of gold, and the upper limit is 4 Kg of gold per investor (individual and HUF). For entities such as trusts and universities, 20 Kg of gold is permissible.
Tenure
The maturity period of the sovereign gold bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates).
Interest Rate
The current interest rate for SGB is 2.50% per annum on your initial investment. It is paid twice a year (semi-annually). Returns are usually linked to the current market price of gold.
Issuance of Bonds
Only RBI can issue SGBs on the behalf of the Central Government and they are traded on the Stock Exchange. It is issued in multiples of one gram of gold. Investors will receive a Holding Certificate for it. You can also convert it to DEMAT form.
KYC Documentation
You must follow the same Know-your-customer (KYC) norms as when you buy physical gold. You must complete KYC by submitting copies of identity proof such as PAN Card and address proof such as passport, driving license ,VOTER ID card for verification.
Tax Treatment
The interest on Sovereign Gold Bonds is taxable as per the provisions of the IT Act, 1961. In the case of SGB redemption, the capital gains tax applicable to an individual is exempted. Also, long-term capital gains generated are offered indexation benefits to an investor or when transferring the bond from one person to another.
Eligibility for SLR
If banks have acquired bonds after going through the process of invoking lien, hypothecation or pledging, then they accounted for SLR. The capital a commercial bank has to maintain in gold, cash, approved securities before offering credit to customers is called Statutory Liquidity Ratio.
Redemption Price
The redemption price must be in rupees, based on an average of the closing price of gold of 999 purity in the previous three working days.
Sales Channel
The government sells bonds through banks, Stock Holding Corporation of India Limited (SHCIL), and selected post offices as may be informed. The trading of SGBs also takes place via recognized stock exchanges (National Stock Exchange of India or Bombay Stock Exchange) directly or through intermediaries.
Commission
The receiving offices shall levy 1% of the overall subscription amount as commission for the distribution of the bond. From this commission, they will share at least half with intermediaries (agents or brokers).
Advantages of Sovereign Gold Bonds
Absolute Safety
Sovereign Gold Bonds have none of the risks that are associated with physical gold, except the market risks. There are no hefty designing or wasting charges here. Moreover, SGBs earn interest, unlike physical gold which is an idle investment.
Extra Income
You can earn a guaranteed annual interest at the rate of 2.50% (on the issue price), this is the most recent fixed rate.
Indexation Benefit
Long term capital gains arising when investors transfer bonds qualify for indexation benefits. There is also a sovereign guarantee on the principal as well as on the interest earned.
Tradability
You can trade gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing five years of investment, you can trade them on the National Stock Exchange or Bombay Stock Exchange, among others.
Collateral
Some banks accept SGB as collateral/security against loans pledged in DEMAT form. Hence, they will treat it as a gold loan after setting the loan-to-value (LTV) ratio to the value of gold. The India Bullion and JEWELLESR Association Limited determines this.
Bottom Line
SGBs are designed to facilitate gold investment. It also provides tax benefits on maturity, but it is not designed for trading. Therefore, most people who buy these bonds have a long-term vision in mind while investing in these instruments. This is also evident from the low trading volume of SBG in the stock market.
Before you buy SGBs, either during the issue period or from the stock exchange, make sure that you understand the advantages and disadvantages of investing in it. If you decide to invest in SGB, you can get a discounted price if you buy it from a stock exchange.
Remember that SGBs are a great option to include gold as an asset class in your portfolio and diversify the same. However, make sure you learn everything about them before investing.