Gold has been a go-to investment for Indians for a long time, primarily because it is considered very safe and acts as a hedge against inflation. In recent years, digital gold has become very popular due to its advantages over physical gold, such as security, convenience, low cost and fractional ownership. One of the popular forms of digital gold is sovereign gold bonds. In this article, let’s explore the features, benefits and limitations of sovereign bonds.
What are Sovereign Gold Bonds?
Owing to the widespread popularity of gold, the government introduced Sovereign Gold Bonds (SGB) in 2015. They are issued by the Reserve Bank of India (RBI) against grams of gold. SGBs offer investors the dual advantages of fixed return and capital appreciation. They pay a fixed return of 2.5% per annum, and since they are backed by gold, the investor can benefit when the price of the underlying gold increases.
How do Sovereign Gold Bonds Work?
The RBI issues SGBs in tranches on behalf of the government. So far, the government has issued two tranches of SGBs in the financial year 2023-2024 in June and September 2023. When the government issues SGBs, it announces the subscription period, issue date, and price. You can subscribe to the issue during the subscription period and get a confirmation on the issue date, which will be reflected in your demat. Alternatively, you can also buy them in the secondary market.
The minimum investment in SGB is one gram, and the maximum is 4 kilograms. When you invest in SGB, you will earn a fixed interest of 2.5%, paid semi-annually. It has a tenure of eight years but has a lock-in period of five years, during which you cannot withdraw your investment. If you hold the investment until maturity, the capital gains on your investment will be tax-free. However, if you withdraw the investment after five years but before eight years, you will have to pay a capital gains tax.
Features of Sovereign Gold Bonds
The following are the features of sovereign gold bonds.
- Minimum and maximum investment: The minimum investment in an SGB is one gram, and the maximum is 4 kgs.
- Joint investment: You can invest individually or jointly with another account holder, and the maximum investment limit is applicable only to the primary investor.
- Interest: The bonds pay a fixed interest of 2.5%, and the interest will be credited to your bank account semi-annually.
- Tenure: SGBs have a fixed tenure of eight years with premature withdrawal from the fifth year. You can also sell your bonds in the secondary market.
- Price of the issue: The price or rate of the bond is decided by the RBI. It is determied by taking a simple average of the price of gold three business days prior to the issue. The gold price is published by the India Bullion and Jewelers Association Limited.
- Premature withdrawal: You can withdraw your bonds prematurely after five years of holding them. The government allows you to encash your investment in the 5th, 6th, and 7th year, and the payment is made when the interest is disbursed.
- Nomination: You can appoint a nominee for your investment in the bonds. If the investment is made on behalf of a minor, the nomination facility is unavailable.
- Loan against SGBs: You can take a loan against your investment in SGBs. The RBI decides the loan-to-value ratio, and it will be disbursed by the authorized banks.
- KYC: It is important for you to be KYC (know your customer) compliant to invest in these bonds. If you are not KYC compliant, the authorized bank will ask you to submit KYC documents such as a PAN Card, Aadhar Card, driver’s license, Passport, or Voter ID.
- Taxation: The interest income from SGBs is taxable as per your income tax slab rate. The capital gains are not taxable if you hold the bond until maturity. However, if you sell them after five years, but before eight years, the capital gains are taxable as per existing tax rules.
Advantages and Limitations of SGBs
Advantages of Sovereign Gold Bonds
The following are the advantages of investing in SGBs:
- Safety: SGBs are the safest form of holding gold. These do not have any risks that you see with physical gold. No high making charges and no worry of theft.
- Ease of Investing: You can invest in SGBs online through listed bank websites. Online applications and payments usually come with a lower issue price, lower by INR 50 per gram compared to the nominal value.
- Additional Source of Income: SGBs guarantee an annual interest rate of 2.5%, with interest bi-annual payouts. This consistent return can be an extra income stream for you.
- Hedge Against Inflation: Historically seen, capital appreciation from gold has been significant. The returns from gold have been higher than the inflation rate. Thus, SGBs can be a good addition to your investment portfolio.
- Demat Account: You can hold SGBs in your demat account by making a specific request in the application form. Until the dematerialization process is complete, the bonds remain in the RBI’s books. The option to convert to demat is available after the bond allotment.
- Exit Option: SGBs trade on the secondary market. You have the option to trade them on the National Stock Exchange or Bombay Stock Exchange after holding the bond for five years.
- No TDS: Interest earned on SGBs will be reported under the section ‘Income From Other Sources’ but is not subject to TDS (Tax Dedducted at Source).
Limitations of Sovereign Gold Bonds
The following are the disadvantages of SGBs:
- Investment: Unlike gold ETFs, which offer real-time access to gold prices and total liquidity, SGBs are accessible only in specific tranches. Although one can purchase SGBs from the secondary market.
- Liquidity: SGBs have a lower liquidity than physical gold. They have a lock-in period of 5 years for early redemption. The trading volumes of SGBs are also low.
Who Can Invest in Sovereign Gold Bonds?
Only eligible individuals can invest in Sovereign Gold Bonds. The following are eligible persons/organizations who can invest in SGBs.
- Resident Indians
- Hindu Undivided Families
- Trusts and charitable institutions
- Universities and educational institutions
- Non-resident Indians
How to Invest in Sovereign Gold Bonds?
You can purchase SGBs directly online through a commercial bank’s website, RBI Retail Direct website and post office. Following are the steps to invest in sovereign gold bonds:
- Log into your internet banking account
- Navigate to the ‘Sovereign Gold Bond’ option
- Click on ‘Proceed’ under the ‘Terms and Conditions’ set as per the RBI guidelines
- Fill out the registration form
- Mention the quantity you wish to subscribe to and add the nominee details.
- Verify the details and click on ‘Submit’ to complete the process.
Tax Implications of Sovereign Gold Bonds
Capital gains from sovereign gold bonds are tax exempted if you hold them for eight years. However, the interest is taxed. It is taxed under ‘Income from Other Sources’. Also, there is no GST or TDS on the purchase or redemption of sovereign gold bonds.
If the bonds are redeemed before eight years (and after five years lock-in), then the capital gains will be taxable at 20% with indexation benefit.
Conclusion
Sovereign Gold Bonds are a better alternative to physical gold due to the dual benefits they offer in the form of interest and capital appreciation. Moreover, they avoid the challenges of physical storage, value erosion, and theft, which come with buying physical gold. Since sovereign gold bonds pay a fixed interest and are backed by sovereign authority, they are one of the most suitable investments for investors who have a very low tolerance towards risk.
These bonds offer capital appreciation in the long term and hedge the risk against inflation and market volatility. So, investors who want to diversify their portfolio and compensate for the risk of investing in the stock market can consider investing in these bonds. However, before investing in SGBs, you must evaluate your goals and investment horizon. Talk to a financial adviser before considering them for investment.
Frequently Asked Questions (FAQs)
Can minors invest in SGB?
Yes. Guardians, on behalf of the minor, can invest in SGBs.
At what price SGBs are sold?
The price at which SGBs are issued is the simple average of closing price of gold of 999 purity for the last three business days of the week preceding the subscription period. The India Bullion and Jewellers Association Limited publishes the price.
Who is the issuer of SGBs?
SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
Are SGBs secured or backed by gold?
SGBs are not backed by physical gold. However, they are backed by a gaurantee from the RBI to honour the gold price on redemption.
What is the limit to investing in SGBs?
SGBs are issued in denominations of one gram of gold and in multiples thereof. The minimum investment is one gram, while the maximum limit is 4 kg for individuals.
What is the rate of interest, and how will the interest be paid?
SGBs offer a 2.5% fixed interest rate. The interest is paid semi-annually. The bank doesn’t deduct any TDS.
even after 5 years when RBI has allowed investors to redeem, Capital gains tax will be applicable?
Will capital gains tax be applicable after the lock-in period of 5 years ends in sovereign gold bonds?
Yes, capital gains tax will be applicable if you withdraw your investment in sovereign gold bonds after five years, but before eight years.
