Sovereign Gold Bond (SGB) Scheme
"Always invest in gold", our elders have taught us. It pays off well, they said, and they are right.
In India, people have traditionally invested in gold, especially since many cultures consider this yellow metal precious. So if you are planning to invest in it, "Go right ahead", we say!
In fact, why buy chunky jewellery and worry about safekeeping when you can invest in a sovereign gold bond (SGB)? It’s less risky, it’s convenient, and you don’t have to worry about storage.
The sovereign gold bond scheme is a Government of India undertaking that allows you to purchase gold on paper. In simple terms, this scheme is a substitute for holding physical gold, says the Reserve Bank of India. So, you will be purchasing gold in kilograms but not holding on to the metal physically. Investors have to pay for the purchase in cash, and the bonds will be redeemed in cash upon maturity.
Sovereign gold bonds have given an alternative to investors who want to invest in gold but don't want the hassle associated with the physical gold purchase, especially the millennial investors.
The government introduced gold bonds in 2015 to curb gold imports in the Indian market. Since 2015, RBI has released several tranches of gold bonds in the market.
Benefits of sovereign gold bond
So why should you buy an SGB instead of buying actual gold?
- No storage risks and costs: If you purchase gold jewellery, you end up worrying about its safekeeping. You may even have to pay for storage in a bank locker. With this type of bond, the risks and costs of storage are eliminated.
- Low risk: The RBI issues these bonds on behalf of the government. Which also means that the Central government backs the scheme. That makes these bonds safer than purchasing actual gold.
- Payment in market price: When you withdraw your bond, either upon maturity or prematurely, you get the current market price. Investors are assured of the market value of gold at the time of maturity and periodical interest, says the RBI.
- No making charges: When you buy gold jewellery, you pay making charges that you may not be able to redeem upon resale. But with SGB, you need not worry about the making charges or the purity of the gold.
- No tax on capital gains: The government of India has exempted the tax on capital gains for purchase of gold if you invest in a sovereign gold bond. Interests earned, however, will be taxable.
- Indexation Benefits: If you try to transfer (exit) the bond before maturity, you can use indexation to lower the capital gain tax burden.
- Collateral: The paper gold bonds can double as collateral. You can use sovereign gold bonds as collateral to receive loans from banks like you take out a gold loan.
Features of sovereign gold bonds
There are some features unique to the sovereign gold scheme, as prescribed by the RBI.
- Denomination: SGB bonds can be purchased in grams or kilograms of gold only. You have to buy at least one gram of gold to avail of this scheme. There are also restrictions to the upper limit. One can hold a maximum SGB worth 4kg only. If it’s a trust, it can hold 20 kg worth.
- Interest rate: Interest will be paid to you twice a year on the amount of your initial investment and the RBI determines this rate.
- Eligibility: Only Indian nationals and Hindu Unified Families (HUF) can participate in sovereign gold bond schemes.
- Tenure: Usually, this bond matures at eight years. You will have an option to withdraw prematurely after the fifth year.
- Redemption: Upon maturity, the sovereign gold bonds will be redeemed and given to you in cash. The price of redemption shall be based on the simple average of the closing price of gold of 999 purity of previous three business days from the date of repayment, published by the India Bullion and Jewelers Association Limited, the RBI says.
Investors looking for a fixed return on their investment shall find sovereign gold bond a great alternative. These bonds are backed by the government, and hence, no chance of default, which makes them attractive to retirement planners and senior citizen investors. Additionally, it gives you a fixed income of interest semi-annually.
Other Ways To Invest In Gold
Sovereign gold bond is not the only alternative to invest in gold. Gold-backed ETFs are also great to get exposure to the yellow metal, especially if you want to add liquid assets to your portfolio. Let's look at a comparison between investing in physical gold, gold bonds, and ETFs.
|Parameters||Gold Metal||ETFs||Gold Bonds|
|Returns||Has retail value but doesn't generate any return for the investor||Return is usually less than actual gold||More than actual return on gold|
|Purity||The purity of physical gold remains questionable, especially if it is in jewellery form||Electronic form of gold and hence, high purity assured||The gold is of .999 purity and backed by the government|
|Safety||Safety remains a concern; needs high protection from theft and wear/tear||You don't have to hold the physical gold. Hence, no concern over safety||The electronic form of gold is absolutely safe|
|As collateral||Accepted as collateral for gold loan||Don't qualify as collateral||Accepted as collateral. Banks treat it as a gold loan after deciding the Loan to Value ratio|
|Liquidity||Moderately liquid||Highly liquid and tradable like stocks in the market||Liquidity remains a concern for sovereign gold bonds. Tradable after the fifth year during the special exit window. In the secondary market, sold at a discount rate because of the fewer number of buyers|
|Tenure||There is no tenure. You can hold it as long as you want, but daily wear/tear causes marginal loss in value||No fixed tenure. ETFs are traded in the exchange like stocks and indices||Gold bonds mature in eight years|
|Tax Implications||Capital gain tax levies when you sell gold jewellery, coins, or bars||LTCG applies after three years||Gold bonds are exempted from capital gain tax if redeemed on maturity after eight years. LTCG applies only on the interest-earning|
How Do SGBs Work?
SGBs are like holding the purest form of gold in papers/certificates. As defined in the Foreign Exchange Management Act, 1999, a person resident in India, including HUFs, trusts, charitable institutions, and universities, is eligible for investing in SGBs.
Sovereign gold bonds scheme is a new-age investment, allowing you to invest in gold without incurring market risk. It is suitable for long-term investment purposes.
So if you are planning to invest in gold this festive season, we advise you to go for the sovereign gold bond scheme. It is safe, hassle-free and gives you more benefits. You can also gift this bond to your friends and family, as long as they satisfy the eligibility criteria. You can even invest in an SGB on behalf of your child, so your child can reap the benefits.
Sovereign Gold Bonds (SGB) - Frequently Asked Questions
Gold is a very popular form of investment especially in India. However, storing gold in its physical form makes it vulnerable to theft and loss due to calamities. Many Indian investors – as a result – like the idea of SGBs or sovereign gold bonds. In this blog, we are going to cover all the most frequently asked questions related to SGBs.
What are sovereign gold bonds?
Are SGBs risk-free?
Can the gold I have purchased via the SGB get lost due to market fluctuations?
Is safety the only benefit of investing in SGBs rather than physical gold? What are the other benefits?
Is interest compulsory/guaranteed and how can I claim it?
Can anyone, anywhere in the world invest in SGBs?
Where can I buy SGBs?
What documents/KYC does one need to submit to purchase an SGB?
How is payment to be made for a SGB?
Is there any minimum investment amount or maximum investment amount?
Is the limit also extended to my family?
Can I get multiple limits for myself by using multiple IDs or bank accounts?
But individuals can buy 4kg every financial year and trusts can buy 20 kg of gold using SGB every year?
How long should I wait to redeem my SGB?
Is there any lock-in period?
Is there any provision for early redemption? What if I need the money?
Other options are
Are you allowed to hold SGBs jointly?
Can you put down a nominee for your SGB?
What if my nominee is an NRI?
What is the process for redemption?
Step 2 – Obtain and check your holding certificate
Step 3 – Save your holding certificate
Step 4 – keep an eye on gold prices
Step 5 – when the price rises substantially after a few years, go ahead and redeem your investment upon maturity.
Where will I receive my redemption amount?
What if I have closed my account or want to transfer the amount to another bank account?
Can I invest in gold for my children?
What happens in the event of death of the SGB investor?
If the SGB holder has nominees signed up, they may approach Angel One with their claim
Administrators or executors of the SGB holder may put forth a claim
Successors may approach with succession certificate
Joint holder may go ahead and claim
(The process is the same also for a minor investor.)