Sovereign Gold Bonds: What Is It? Why To Invest In It? Benefits, Tax Efficiency, How to Invest, and More

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Simran Kaur
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Sovereign Gold Bonds

In an effort to decrease the demand for physical gold on the domestic market, the government approved the launch of the Sovereign Gold Bond Scheme in 2015, with Prime Minister of India Shri Narendra Modi serving as the chair of the Union Cabinet, by shifting a part of the approximately 300 tons of physical bars and coins that are purchased each year, to invest in gold bonds. Since most of India’s gold demand is met through imports, this scheme was intended to ultimately help keep the country’s current account deficit within sustainable limits.

Shri Narendra Modi’s ambitious plan to mobilise some 22,000 tonnes of gold in the hands of individuals spread across the country appears to have stalled, as his statistics show that the exchange of state bonds for physical gold has been a failure, as We reported in this same space a week ago. The issuance of the sovereign gold bonds was under the market lending program of the government of India for the years 2015-2016 and beyond.

What is a Sovereign Gold Bond (SGB)?

The sovereign gold bond (SGB), issued by the Reserve Bank of India (RBI) on behalf of the Government of India, is a means of owning gold in paper form. By investing in SGB, investors do not get physical gold but rather participate in any growth (or fall) in the price of gold. Investment in SGB is therefore solely for investment purposes and not for consumption needs.

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors must pay the issue price in cash and the bonds will be redeemed for cash at maturity, always in rupees. The Bond is issued by the Reserve Bank on behalf of the Government of India.

While physical gold purchased from jewellers or banks might command a premium of around 10 per cent, the price of SGB is close to the actual price of gold. Additionally, SGB taxation favours investors as gains are exempt upon maturity, unlike physical gold where gains are taxable. The sale of the bonds is restricted to resident Indian entities. The limit of bonds that an entity can purchase would be an appropriate level, no more than 500 grams per person per year. The term of the bond could be for a minimum of 5 to 7 years, so it would protect investors from the medium-term volatility of gold prices.

Benefits of Sovereign Gold Bonds

Sovereign Gold Bonds provide various benefits to the investors-

  • Safety & Security: Sovereign Gold Bonds are issued by the Government of India and backed by a Sovereign guarantee, which makes it the safest investment for investors. There is no risk because the government will insure your principal amount.

  • Convenient and Cost-Effective: There is a physical storage and security arrangement required to buy gold under the Sovereign Gold Bonds Scheme. It is very convenient and cost-effective. There is no risk of theft and loss but it also saves investors from incurring additional storage costs.

  • Fixed Rate Of Interest: One of the most unique features of Sovereign Gold Bonds is that they provide a fixed rate of interest which is payable semi-annually. Moreover, the rate of interest is also fixed by the government and remains fixed through the tenure of the bond. Investors can enjoy the regular income stream with a potential capital appreciation.

  • Capital Gains Tax: Under Sovereign Gold Bonds, investors can enjoy the capital gains tax. Remember, there is no capital gain tax on redemption at maturity if the bonds are held until maturity. Moreover, indexation benefits are provided for long-term capital gains if sold after 3 years.

  • Tradable on the Stock Exchange: Sovereign Gold Bonds are listed on the stock exchange, providing investors with liquidity. With a Demat account, investors can buy or sell Sovereign Gold Bonds in the secondary market.

  • Long-Term Investment: Sovereign Gold Bonds have a fixed tenure, from 5 to 8 years. But investors can exist before tenure ends after a certain lock-in period. Sovereign Gold Bonds are ideal for long-term investors who want a diversified portfolio and build wealth.

  • Tax-Efficient Investment: Sovereign Gold Bonds are a tax-efficient investment option for investors.  Sovereign Gold Bonds are taxable with capital gain tax and interest benefits. However, the interest income received is eligible for deduction under Section 80C of the Income Tax Act.

  • Sovereign Guarantee: AS Sovereign Gold Bond issued by the government of India, they carry the Sovereign Guarantee which investors with an assurance of repayment. It is one of the safest investment options available in the market.

  • Subscription in Small Denominations: Investors can subscribe to SGBs in small denominations, typically starting from one gram of gold. Within time, investors can invest and increase their gram and interest.

Why To Invest On Sovereign Gold Bonds?

Investing in Sovereign Gold Bonds gives a good opportunity for the investor to buy gold as well as enjoy many unique advantages. We already mention the number of benefits of Sovereign Gold Bonds. One of the primary reasons to invest in Sovereign Gold Bonds is the safety and security. It is issued by the Reserve Bank Of India(RBI) on behalf of the Government Of India. It is one of the safest forms of investment in gold under the government with no risk. Unlike physical gold, it does not require security. There is no change of loss and theft. It is held in electronic form and eliminates the physical gold. Finally, SGBs offer transparent pricing based on the prevailing market price of gold at the time of subscription, plus a nominal premium. Hence, everyone should invest in the Sovereign Gold Bonds.

How To Invest On Sovereign Gold Bonds?

If you want to buy Sovereign Gold Bonds, here is the process

  • First, check the eligibility criteria set by the Reserve Bank Of India for Sovereign Gold Bonds. Individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions all are eligible to invest in Sovereign Gold Bonds.
  • Keep an eye on the issuance schedule announced by the RBI. they announce various tranches throughout the year, You can invest any time.
  • Until then, finalise which authorised channel you choose to apply for the Sovereign Gold Bonds. Scheduled Commercial banks, Post Offices, Stock Holding Corporation of India Lit, Stock Exchange are the options.
  • After selecting an authorised channel, complete your KYC Documentation to apply for Sovereign Gold Bonds. During KYC, you have to provide identification proof, address proof and many more.
  • For the application process, log in to your account with an authorised channel for online purchases, You can also buy offline, and request Sovereign Gold Bonds from there.
  • Decide the amount of investment you want to make with Sovereign Gold Bonds. The minimum subscription amount for Sovereign Gold Bonds is typically one gram of gold.
  • Make the payment for your Sovereign Gold Bonds subscription by various online modes like internet banking, NEFT, UPI or cheque, etc.
  • After the successful submission of your application and payment, you will get a confirmation in the email like Sovereign Gold Bonds Receipt.
  • Once the subscription period for the respective tranche closes, the RBI will allot the SGBs based on the applications received. If your application is successful, RBI will allot the SGB units to your demat account.
  • You can start trading with the SGB too because it is tradable on the stock exchange.
  • Remember, implications are associated with investing in SGBs. While there is no capital gains tax on redemption at maturity.

FAQ(Frequently Asked Questions) On Sovereign Gold Bonds:-

Q.1 Is sovereign gold bond a good investment?

Yes, sovereign gold bonds are one of the best investment options for long-term capital growth. Every investor should invest in sovereign gold bonds.

Q.2 What happens after 8 years of sovereign gold bond?

After 8 years, when the sovereign gold bond, the interest and maturity will be credited to the investor’s bank account. It is an easy and secure investment option.

Q.3 Is SGB better than FD?

It depends on the personal preference of the investor. But, SGB(sovereign gold bond) provides a hedge against inflation.

Q.4 Are gold bonds tax free?

A sovereign gold bond is taxable under the provisions of the Income Tax Act of 1961 (43 of 1961).

Q.5 Is SGB better than PPF?

Yes, SGB(sovereign gold bond) provides a hedge against inflation.

Q.6 Is SGB 24 carat gold?

SGB is not a physical gold, it is an electronic form. Investors can invest in  99.9 percent pure gold of 24 carats by SGB.

Q.7 What are the disadvantages of SGB?

A Sovereign Gold Bond Scheme (SGB) is a long-term investment of 5 to 8 years, which can be a disadvantage for some investors.

Q.8 What is the lock period of SGB?

The Sovereign Gold Bond Scheme (SGB) comes with a fixed tenure which ranges from 5 to 8 years.

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