India has a deep-rooted cultural and economic connection with gold. For centuries, gold has been seen as a symbol of wealth and security, making India one of the largest consumers of gold globally. However, traditional gold purchases have often led to challenges like storage, safety concerns, and liquidity issues. Recognizing this, the Government of India introduced Sovereign Gold Bonds to find an alternative to gold investments that offer convenience and security while reducing the demand for gold to be imported. It also promotes savings in households making it a productive investment.
In this article we will delve deep in what are sovereign gold bonds what are their key features & which is good for investment sovereign gold bond or Physical Gold.
– What is Sovereign Gold Bond
Sovereign gold bonds are RBI mandated certificates issued against grams of gold, allowing individuals to invest in gold without the strain of safekeeping their physical asset. Sovereign gold bonds act as a secure investment tool among individuals, as gold prices are less susceptible to market fluctuations.
As these bonds are issued by the RBI under Government of India stocks, a particular window is pre-set for subscription, during which a sovereign gold bond scheme is issued in the name of investors in tranches. Generally, the RBI announces issuance of latest sovereign bonds in a press release every 2-3 months, with a one-week window during which individuals can subscribe to this scheme. Holding certificate is issued in the name of investor upon successful purchase of Sovereign gold bond.
– Features of Sovereign Gold Bond (SGB)
1. Eligibility: Indian residents, including individual investors, HUFs (Hindu Undivided Families), trusts, universities, charitable institutions, and corporations, can purchase sovereign gold bonds. One can also invest on behalf of a minor.
2. Minimum & Maximum Cap: SGBs are issued in grams of gold, with a minimum investment of 1 gram and a maximum of 4 kg for individuals and Hindu Undivided Families (HUFs). Trusts and other similar entities can invest up to 20 kg.
3. Tenure: Sovereign gold bonds come with 8-year-long tenures. The minimal holding period is 5 years; premature withdrawal will be permitted only after that. Investors can exit the bond on the 5th, 6th, and 7th years of bond tenure, but only on the interest payment dates. A request for premature redemption can be made 30 days before the interest payment date via the concerned bank, post office, offices of Stock Holding Corporation of India Limited, or agent. The last date for the request is one day before the interest payout date.
4. Coupon Rates: The Coupon rate of 2.5% p.a. is associated with the sovereign gold bond scheme, which is disbursed half yearly to investors.
5. Taxation: If you hold an investment till maturity that is 8 years, the capital gain tax is 0, otherwise, it attracts short-term capital gain tax if sold before 3 years as per individual’s tax slab or long-term capital gain tax if sold after 3 years, it is taxable for 10% without indexation or 20% with indexation.
6. Redemption: The redemption price is decided on the average closing price of gold of 999 purity in the previous 3 working days. India Bullion & Jewellers Association Ltd. (IBJA) is responsible for publishing the same.
– How is the price of an SGB issue determined?
The issue price is decided by the Government of India on behalf of the RBI. The issue price is the average of the last 3 business day’s closing price of the 999-purity gold which is normally announced by the India Bullion and Jewellers Association Ltd.
Suppose the SGB is issued on July 10 to 17, the prices on July 3, 4, and 5 of the 999-purity gold being 6000, 6050, and 6100. The average of these prices is taken into account for the issue price. That is (6000 + 6050 + 6100) / 3 = 6050. Therefore, the issue price of SGB on July 10 to 17 is Rs. 6050.
– Key Benefits of investing in a Sovereign Gold Bond
- Low Investment Value: An investor can start an investment with a minimum amount as low as 1 gram of gold.
- Safe Returns: 2.50% interest per annum is assured by sovereign backing.
- Capital Appreciation: The market rate of gold tends to stay high, creating better opportunities for the investment to grow.
- Tax-Saving: The long-term capital gain is taxed exempted if the bond is held till maturity.
– Limitations of Sovereign Gold Bond
- The tenure of staying invested is 8 years long with premature withdrawal allowed only after the 5th year.
- The interest income earned is taxable as per the individual tax slab rate
- The prices are linked to the gold and can be volatile.
- Depending on the demand in the secondary market the selling can be limited.
- The person must have digital knowledge to understand the transactions and open a demat account.
- To be making return out of an investment, you must stay in it for 8 years.
– Which is good for investment Sovereign gold bond or Physical Gold?
| Sovereign Gold Bond (SGB) | Physical Gold Bond |
| Sovereign Gold Bonds (SGB) are government securities denominated in gold. | Physical gold’s purity may or may not be 99.5%. |
| The Government determines the issue rate. | Physical gold prices are not uniform. |
| 5 years lock in period. | No lock in period. |
| The Gold bonds are issued in units. One unit is equal to 1 gram. The minimum investment is 1 gram of gold, while the maximum limit is 4 kgs of gold per investor. | Gold biscuits or coins are available in the standard denominations of 10 grams. Hence, it requires a huge investment to invest in physical gold. |
| The capital gains tax on redemption is zero. Also, the long-term capital gains come with indexation benefits. However, the capital gains for premature redemption are taxable similar to physical gold. | The capital gains from a gold investment held for less than three years are taxable as per the investor’s income tax slab rates. For an investment withholding period of more than three years, the gains are taxable at 20% with indexation benefit. |
| One can trade their bonds on the stock exchange after the 5-year lock-in period. | One can easily buy physical gold from any bank or jeweller. They can be exchanged through a jeweller anywhere in the world. |
| Not mandatory. However, the investors have an option to hold their units in demat account. | Not Required. |
– Who should consider investing in SGB?
- The long-term investor who ideally wants to invest 5-7 years long investment.
- Risk Averse investors who prefer the safety & stability of an investment.
- Investors who are seeking regular income can receive interest income twice a year.
- Ideal for the investors who want to diversify their portfolio with gold without storing physical gold.
- Tax -Conscious who want to save on capital gains & want to receive indexation benefits for holding for 3 years.
Conclusion
Sovereign Gold Bonds represent a compelling investment option for those looking to invest in gold without the hassles of physical ownership. With benefits like assured interest, tax-free redemption, and the security of government backing, SGBs stand out as an attractive, modern investment vehicle in the Indian market. As the de-dollarization is likely to enhance the appeal of sovereign gold bonds for investors by increasing the demand for gold as a stable and secure asset. Consequently, investors seeking to diversify their portfolios and safeguard their wealth in times of economic transition will likely find sovereign gold bonds increasingly appealing.
To understand more in detail on this topic you can visit our previous blog on gold as an asset class at: https://richvikwealth.in/decoding-gold-as-an-asset-class/
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The article is authored by Mr. Saurabh Gosavi from Team RichVik