Indians have a strong affinity for gold! Whether it’s Raksha Bandhan or Diwali, many seize every opportunity to purchase this precious metal.
Annually, Indians buy around 700–800 tonnes of gold, reflecting an insatiable demand.
While India produces very little gold domestically, most of it is imported. This heavy reliance on gold imports poses challenges to government policy, especially as the focus shifts toward boosting our Foreign Exchange Reserves. To address this issue, Sovereign Gold Bonds were introduced in 2015 as an alternative to traditional physical gold.
What Are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are government-backed securities valued in grams of gold, serving as a convenient alternative to physical gold ownership. Investors pay the issue price in cash, and upon maturity, the bonds are redeemed in cash. The Reserve Bank of India (RBI) issues these bonds on behalf of the Government of India, ensuring a secure and regulated investment option.
Investors benefit from a guarantee on the quantity of gold purchased, receiving the market price of gold upon redemption. This makes SGBs a superior choice compared to traditional gold holdings, eliminating the associated risks and costs of storage.
By investing in SGBs, individuals are assured of the gold’s market value at maturity, along with receiving periodic interest payments. Additionally, SGBs avoid issues such as making charges and purity concerns that often accompany gold jewelry. The bonds are maintained in RBI’s books or in Demat form, mitigating the risk of physical loss or theft.
The Purpose behind SGB
Sovereign Gold Bonds (SGB) fall under the debt fund category and have not only reduced the demand for physical gold but also facilitate tracking its import and export. These bonds are transparent products regulated by the RBI, making them particularly beneficial for investors interested in gold. With SGBs, there’s no risk of theft, no storage fees, and they are fully backed by the Government of India, eliminating the need for a bank locker. The value of SGBs is linked to gold grams, serving as a viable alternative to physical gold investments while maintaining consistent quantities. Investors can purchase SGBs through brokers, online banking, or designated offices. Thus, those keen on gold investments should consider Sovereign Gold Bonds, as the costs associated with buying or selling them are minimal compared to physical gold.
Who is eligible to invest in Sovereign Gold Bonds?
Sovereign Gold Bonds can be owned by various entities, including trusts, Hindu Undivided Families (HUFs), charitable institutions, universities, or individuals residing in India. Individuals can hold the bonds either in their own name, on behalf of a minor child, or jointly with another individual. If an individual investor’s residential status changes from resident to non-resident, they may still retain their SGBs until the original redemption or maturity date.
SGB Interest Rate
The bonds carry an interest rate of 2.50% per annum (for Financial Year 22–23) based on the bond’s nominal value. Interest will be credited to the investor’s bank account semi-annually, with the final interest payment made upon maturity along with the principal amount.
SGB Limit of Investment
The bonds are available in denominations of 1 gram of gold and its multiples. The minimum investment required for these bonds is one gram, while the maximum subscription limit is set at 4 kg for individuals and 20 kg for trusts and similar entities.
For joint holders, the limit pertains to the first applicant. The annual cap encompasses bonds subscribed during various tranches in the initial issuance by the Government as well as those acquired from the secondary market. Investments used as collateral by banks and other financial institutions are excluded from this limit.
Price of Bond
The nominal value of gold bonds will be set in Indian Rupees, determined by the simple average of the closing price of 999 purity gold, as published by the India Bullion and Jewellers Association (IBJA) Limited, for the last three business days of the week prior to the subscription period.
For investors applying online, the issue price of the gold bonds will be ₹50 per gram lower than the nominal value, provided that payment for the application is made digitally.
SGB as Collateral
Another advantage of buying Sovereign Gold Bonds (SGBs) is their usability as collateral for loans. When institutions accept SGBs as collateral, it lowers the overall borrowing costs and serves as an incentive for individuals who typically invest in physical gold as a safety net during challenging times.
SGB Maturity
The gold bonds will reach maturity eight years from their issue date. Upon maturity, they will be redeemed in Indian Rupees, with the redemption price determined by the simple average of the closing price of 999 purity gold over the previous three working days, as published by the India Bullion and Jewellers Association Limited.
Both the interest and redemption amounts will be credited to the bank account provided by the customer when purchasing the bond. The RBI or depository will notify the bond’s maturity date one month in advance.
SGB Premature Redemption
Although the bond has a maturity of eight years, investors can redeem it early after the fifth year from the issue date. Repayment for early redemption will occur on the next interest payment date. Additionally, the bond can be traded on exchanges if held in Demat form and may be transferred to any other eligible investor.
Tax Implications on SGBs
The interest earned on sovereign gold bonds (SGBs) is taxable under the “Income from Other Sources” category, subject to the tax rates applicable to the taxpayer. However, interest payments on SGBs are exempt from tax deduction at source (TDS) since they are classified as Government Securities. Consequently, investors will receive the entire interest amount directly in their bank accounts.
Additionally, SGBs are exempt from capital gains tax if held from the time of issue until maturity.
Benefits of Investing in SGBs
- SGBs are ideal for investors focused on gold as an investment.
- They protect the quality of gold and secure investors against risks.
- Investors save on physical gold storage costs since SGBs are digital and held in a Demat account.
- The 2.5% interest rate offers an attractive passive income, directly credited to bondholders’ accounts.
- SGBs serve as excellent market-linked gift options.
- Capital gains on maturity are fully tax-exempt, appealing to long-term investors.
Risks Involved in Buying SGBs
- Investors face a risk of loss if gold’s market price drops below its cost price.
- This risk is not unique to the Sovereign Gold Bond (SGB) scheme but applies to all gold investments.
- The Reserve Bank of India (RBI) guarantees that investors will not lose the quantity of gold allocated to them.
- For more information on debentures, visit Share India.
Conclusion Sovereign Gold Bonds (SGBs) present an appealing investment option. By examining the benefits and potential risks linked to SGBs, you can make an informed decision about whether to invest in them. SGBs offer several advantages, such as capital appreciation, interest income, and safety since they are backed by the government. However, it’s crucial to consider risks, including market fluctuations and liquidity constraints. Understanding these factors will empower you to weigh the pros and cons effectively. Ultimately, this analysis will guide you in determining if investing in SGBs aligns with your financial goals and risk tolerance.
