Sovereign Gold Bonds (SGBs): Should you invest?

Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. It is an alternative to holding physical gold as you are buying and holding gold in electronic form. Their value is denominated in multiples of grams of Gold.

The application for the purchase of gold bonds can be made in physical form as well as online. These bonds can be purchased through authorized banks/designated Post office/Stock Holding Corporation of India Limited (SHCIL) and designated brokers. These bonds are also traded on the recognized stock exchange viz NSE and BSE. If you buy it online, the issue price is  Rs. 50/g lower than the nominal value. So, if you apply online for the current issue, the cost per 1 g of gold will be Rs. 5,059/- as against the issue price of Rs. 5,109/-.

If you apply for these bonds in physical form, you can make a request in your application form for conversion into Demat form. Till the process of dematerialization is complete, the bonds will be held in the books of RBI. The facility of conversion is available after your purchase/allotment also.

The government of India in consultation with the RBI has issued SGBs as per the calendar specified below:

Minimum and Maximum Investment: The minimum investment that can be done is 1 g of gold and the maximum investment limit for Individuals and HUF is up to 4 kgs per fiscal year (April to March). In case the investment is done in the joint name, the maximum holding limit of 4 kgs applies to each individual on a first name basis. For entities like trust and others notified by the government, the maximum investment limit is 20 kgs.

Interest Terms: These bonds earn interest at a fixed rate of 2.5% per annum on your investment value. The interest is payable semi-annually.

Maturity: SGBs have a maturity period of 8 years post which they will be redeemed. However, investors have the option for pre-mature redemption of these gold bonds after 5 years from the date of issue. Early redemptions occur only on the dates when interest is paid on the bonds. So after 5 years from the date of issue, the bonds can be redeemed twice a year.

Redemption Price: For the redemption of SGBs, prices of 99.9% purity gold published by India Bullion and Jewelers Association Limited (IBJA) are used.  The redemption price is the simple average of the closing prices of the last 3 business days, prior to the redemption date. Redemption proceeds are directly credited to the investor’s bank account.

Advantages of buying SGB’s:

• • The main advantage of investing in SGB’s when compared to other gold-linked instruments is that besides appreciation in price, one can earn fixed interest @2.5% per annum on investment value. 
  • As these bonds are issued by the Government of India, they are highly secure investments from a credit perspective.
  • As the SGBs can be held in Demat form, there is no risk of the securities getting lost or stolen.
  • One doesn’t have to worry about the purity/quality of the gold.
  • SGB’s are tradable on the stock exchange and hence provide easy liquidity.
  • SGB’s are accepted as collateral by many banks/ financial institutions just like physical gold, hence one can easily avail loans on these.
  • Investors can assign nominees for their SGBs.
  • When you buy physical gold GST of 3% is charged on the purchase value which includes the total value of gold plus making charges. If you buy jewellery a GST of 5% is levied on making charges. When you invest in SGBs, there is no GST applicable, hence the purchase cost is lower.

Tax Implications:

• • Interest earned on these bonds is taxable under the head Income from other sources as per your tax slab. TDS is not deducted when interest is paid to you. Hence, one has to add it to your total income and pay tax accordingly.
  • If the bonds are redeemed on maturity, the proceeds received are tax-free for an individual. Even if the bond is purchased from the secondary market by an individual and held till the redemption date, then the redemption proceeds on maturity for the buyer are tax-free.
  • If the bonds are held for less than 1 year and sold in the stock market, then the resulting profit/loss will be considered as Short-Term Capital Gain/Loss and will be taxed accordingly.
  • If the bonds are sold in the stock market after the completion of 1 year, the resulting gain/loss will be classified as Long Term Capital Gain/Loss and taxed accordingly. Indexation benefit is available on Long Term Capital Gain (LTCG). The same tax treatment applies to the redemption of the bonds after the minimum lock-in period of 5 years.

Disadvantages of buying SGB’s:

• • The maturity period of 8 years, is very long. However, the investor can redeem the bond after 5 years from the date of investment. If you want to liquidate your investment sooner, then the SGBs can be sold on the stock exchange.  The sale, however, will attract capital gains tax based on the tenure of holding.
  • The tax benefit is available to investors only when they hold and redeem the bond at a full maturity period of 8 years.  Investors looking for tax savings are thus exposed to the risk of underlying gold prices for a long time period.
  • NRI’s can’t invest in SGB’s. However, if the status of a resident changes to Non-resident they can continue to hold the bonds till maturity.

Other Ways to Invest in Gold:

Gold is a popular commodity for investment and is a good way of diversifying your portfolio but there is a risk involved. There are different investment options available for investing in gold. One can either buy it in physical form or invest in Gold ETFs, Gold Mutual funds, or SGB’s. Investment in each form has its pros and cons. 

Physical Gold: Buying and storing physical gold carries the risk of theft. It is also hard to assess the purity of physical gold. Further, GST is applicable on the gold value and making charges. If you buy jewellery, additional GST is applicable on making charges as well.

GOLD ETFs: Gold ETF is another form of investment in gold. But ETFs usually charge fees (expense ratio) for the investment.  Also, ETFs don’t pay any interest income.

Gold Mutual Funds: Gold MF has good liquidity in the secondary market, but these also charge high fees for investment (expense ratio) + additional fees on sale/redemption of the instrument.

Hence, in my personal opinion, SGB’s stand out amongst all these investment avenues when it comes to investing in gold for the long term as they are government-backed, they give fixed interest income besides appreciation in price and potential tax savings. However, one has to consider buying them at the right price, to fetch good returns.

For more information on SGB’s, you can visit RBI press release

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