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For Indians, the reverence they have for gold is beyond its market value. Now there are ways to own gold without its inherent risks or bearing making and wastage charges. Sovereign Gold Bonds are one such alternative, offered by the Government of India and RBI. Here, you can own gold in ‘certificate’ format.
The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015, to offer investors an alternative to physical gold. Over the years, the market has witnessed a considerable decline in the demand for physical gold. SGB not only tracks the export-import value of the asset but also ensures transparency at the same time.
SGBs are government securities and are considered safe. Their value is denominated in multiples of grams of gold. SGBs have witnessed a significant increase in investors, with it being considered a substitute for physical gold.
If you are looking to purchase an SGB, all you have to do is approach a SEBI authorised agent or broker. Once you have redeemed the bond, the corpus (as per the current market value) will be deposited into your registered bank account.
You may consider diversifying your portfolio with at least 5%-10% in gold. As a low-risk investment, it is perfect for investors with a low-risk appetite. Compared to physical gold, the cost to purchase or sell SGBs is quite low.
The expense of buying or selling the SGB is also nominal in comparison to the physical gold.
Those who do not want to go through the hassles of storing physical gold can also go for SGBs. This is because it is easy to store this in Demat form, and nobody can steal it as they are in electronic form.
Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. You may also invest on behalf of a minor.
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 Kg of gold per investor (individual and HUF). For entities such as trusts and universities, 20 Kg of gold is permissible.
The maturity period of the sovereign gold bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates).
The current interest rate for SGB is 2.50% per annum on your initial investment. It is paid twice a year (semi-annually). Returns are usually linked to the current market price of gold.
Only RBI can issue SGBs on the behalf of the Central Government and they are traded on the Stock Exchange. It is issued in multiples of one gram of gold. Investors will receive a Holding Certificate for it. You can also convert it to Demat form.
You must follow the same Know-your-customer (KYC) norms as when you buy physical gold. You must complete KYC by submitting copies of identity proof such as PAN Card and address proof such as passport, driving license, Voters ID card for verification.
The interest on Sovereign Gold Bonds is taxable as per the provisions of the IT Act, 1961. In the case of SGB redemption, the capital gains tax applicable to an individual is exempted. Also, long-term capital gains generated are offered indexation benefits to an investor or when transferring the bond from one person to another.
If banks have acquired bonds after going through the process of invoking lien, hypothecation or pledging, then they accounted for SLR. The capital a commercial bank has to maintain in gold, cash, approved securities before offering credit to customers is called Statutory Liquidity Ratio.
The redemption price must be in rupees, based on an average of the closing price of gold of 999 purity in the previous three working days.
The government sells bonds through banks, Stock Holding Corporation of India Limited (SHCIL), and selected post offices as may be informed. The trading of SGBs also takes place via recognised stock exchanges (National Stock Exchange of India or Bombay Stock Exchange) directly or through intermediaries.
The receiving offices shall levy 1% of the overall subscription amount as commission for the distribution of the bond. From this commission, they will share at least half with intermediaries (agents or brokers).
Sovereign Gold Bonds have none of the risks that are associated with physical gold, except the market risks. There are no hefty designing or wasting charges here. Moreover, SGBs earn interest, unlike physical gold which is an idle investment.
You can earn a guaranteed annual interest at the rate of 2.50% (on the issue price), this is the most recent fixed rate.
Long term capital gains arising when investors transfer bonds qualify for indexation benefits. There is also a sovereign guarantee on the principal as well as on the interest earned.
You can trade gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing five years of investment, you can trade them on the National Stock Exchange or Bombay Stock Exchange, among others.
Some banks accept SGB as collateral/security against loans pledged in Demat form. 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.
| Particulars | Physical Gold | Gold ETF | Sovereign Gold Bond |
| Returns/earnings | Lower than the 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 | The purity of gold always remains a question | High as it is in electronic form | High as it is in electronic form |
| Gains | LTCG after three years | Long-term capital gain post after three years | LTCG post three 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 the government |
| Storage expenditures | High | Minimal | Minimal |
Gold Sovereign Bonds are new-age investment vehicles for those interested in diversifying the portfolio with gold holdings.
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3yr Returns
19.5%
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