Log In Sign Up

Invest in Mutual Funds &
Get More Returns

Start Investing

Sovereign Gold Bonds Schemes

Updated on

For Indians, gold is more than a precious metal. In fact, the reverence for gold is beyond its market value for a common man. However, the making charges of gold can be quite high. Therefore, Government of India and RBI have come up with many alternatives like gold ETFs, gold bonds etc. Here, you can own gold in ‘certificate’ format. This article explores Sovereign Gold Bonds in detail.

  1. What are Sovereign Gold Bonds?
  2. Who should invest in Sovereign Gold Bonds?
  3. What are the features of SGBs?
  4. Advantages of Sovereign Gold Bonds
  5. Sovereign Gold Bonds Vs other gold schemes
 

Invest in the Best Mutual Funds

Invest in 7 Mins | Free | 100% Online | Easy to Use | Safe

 

1. Sovereign Gold Bonds

The government of India lately introduced Sovereign Gold Bond Schemes to offer investors another way to own gold. Hence, it belongs to the debt fund category. It not only brought down the demand for real gold, but could also track import-export of the same. There is a transparency about this product as it comes under the purview of RBI. People who see gold more as an investment than an accessory (ornament), can opt for this. So, they need not waste money on making charges. Nor do they have to find ways (like hiring a bank locker) to store it safely. SGBs are government securities and hence safe. Their value is denominated in multiples of gold grams. This is why, it is a substitute for investing in physical gold. If you want to purchase a bond, just approach any agent, authorized by SEBI. After redeeming the bond, they will deposit the corpus (as per the current market value) to your registered bank account.  

2. Who should invest in SGBs?

People who have a penchant for gold investments can consider sovereign gold bonds. As a low-risk investment, it is perfect for investors with low risk appetite. It also earns you a fixed income bi-annually. Therefore, if all these appeal to you, you can certainly consider buying an SGB. Compared to physical gold, the cost to purchase or sell SGBs are quite low. The expense of buying or selling the SGB is nominal in comparison to the physical gold. Those who do not want the hassle of keeping physical gold safe can also go for this. This is because it is easy to store this in demat form, and nobody can steal it as they are in paper form. So, if you are seeking a long-term investment avenue to make good returns, a gold bond can meet your needs.

3. Features of Sovereign Gold Bonds

a. Eligibility criteria

Any Indian resident – individuals, Trusts, HUFs, Charitable Institutions and universities – can invest in SGB. You may also invest on behalf of a minor.

b. Denomination/value

The value of the bonds is assessed in multiples of gram(s) of gold, wherein the basic unit is 1 gram. The minimum initial investment is 1 gram of gold, and the upper limit is 4 kgs of gold per investor (individual & HUF). For entities like trusts and universities, 20 kgs of gold is permissible.

c. Tenure

The bond’s maturity period is for 8 years. However, you can choose to exit the bond from 5th year onwards (only on interest payout dates). Sovereign Gold Bonds

d. Price & payment

You can pay online, by cash (only up to Rs. 20,000), DD or cheque. There will be a service charge deduction of Rs. 50 of those who pay online.

e. Interest rate

The current interest rate for SGB is 2.50% annually. They are paid twice a year on the nominal value. Returns are usually linked to the current market price of gold.

f. Issuance of bonds

Only Government of India Stocks (on RBI’s behalf) can issue gold bonds as per the GS Act, 2006. Investors will receive a  Holding Certificate for it. You can also convert it to demat form.

g. KYC  Documentation

You must follow the same Know-your-customer (KYC) norms when you buy physical gold. Hence, keep the KYC documents like copy of Driving License, PAN Card, Passport or Voter ID with you.

h. Tax treatment

There is no tax deducted at source on the proceeds from sovereign gold bond redemption. You can also claim indexation benefits along with long term capital gains when you decide to transfer the bond. So its tax implications are different from that of gold ETFs.

i. Eligibility for SLR

If banks have acquired bonds after going through the process of raising lien, hypothecation or pledging, they get counted towards SLR. The capital a commercial bank has to retain before giving credit to customers is called Statutory Liquidity Ratio.

j. Redemption  price

The redemption price must be in INR, based on average of closing price of gold of 999 purity in 3 previous working days.

k. Sales channel

The government sells bonds through banks, Stock Holding Corporation of India Limited (SHCIL) and selected post offices as may be informed. The trading also occur via recognized stock exchanges (National Stock Exchange of India or Bombay Stock  Exchange) directly or through intermediaries.

l. Commission

The receiving offices shall levy 1% of the overall subscription amount as commission for bond distribution of the bond. From this commission, they will share at least half with intermediaries (agents or brokers).  

4. Advantages of Sovereign Gold Bonds

a. Absolute safety

Sovereign gold bonds carry none of the risks that is associated with physical gold, except the market risks. There is no hefty designing charge or TDS here. Therefore, nobody can steal it or change its ownership.

b. Extra income

You can earn guaranteed annual interest at the rate of 2.50% (on the issue price). This is the most recent fixed rate.

c. Indexation benefit

If you transfer your bond before maturity, you can get indexation benefits. There is also a sovereign guarantee on the redemption money as well as on the interest earned.

d. Tradability

You can trade the gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing 5 years of investment, you can trade them on National Stock Exchange or Bombay Stock Exchange among others.

e. Collateral

Some banks accept SGB as collateral/security against secured loans. Hence, they will treat it as a gold loan after setting the loan-to-value (LTV) ratio to the value of gold. The India Bullion and Jewellers Association Limited determines this.  

5. Comparing SGB with Physical gold & Gold ETFs

Particulars

Physical Gold Gold ETF

Sovereign Gold Bond

Returns/earnings Lower than real return on gold due to making charges Less than actual return on gold More than actual return on gold
Safety Risk of theft, wear/tear High High
Purity Purity of Gold always remains a question High as it is in Electronic Form High as it is in Electronic Form
Gains LTCG after 3 years Long term capital gain post after 3 years LTCG post 3 years. (No capital gain tax if redeemed after maturity)
As loan collateral Accepted Not accepted Accepted
Tradability or exit formalities Restrictive Tradable on Stock Exchange Can be traded and redeemed from the 5th year with government
Storage expenditures High Minimal Minimal
  In short, gold sovereign bonds are new-age investment vehicles for those who are interested in the gold sector. So, if the above description matches your financial goals, you can go for this.  

Invest in the Best Mutual Funds

Invest in 7 Mins | Free | 100% Online | Easy to Use | Safe