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Sovereign Gold Bonds Schemes ( SGB )

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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 charges. Sovereign Gold Bonds are one such alternative, offered by the Government of India and RBI. Here, you can own gold in ‘certificate’ format. This article explores Sovereign Gold Bonds in detail.

1. Sovereign Gold Bonds

The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to offer investors an alternative to own gold. Also, it belongs to the debt fund category.

Over the years, the market has witnessed a considerable decline in the demand for physical gold. SGB not only tracks the import-export 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 gold grams. SGBs has 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. Once you have redeemed the bond, the corpus (as per the current market value) will be deposited to your registered bank account.

2. Who should invest in SGBs?

People who have an affinity towards gold investments can consider Sovereign Gold Bonds. As a low-risk investment, it is perfect for investors with low-risk appetite. It also gives you a fixed income bi-annually. 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 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 and HUF). For entities such as trusts and universities, 20 kgs of gold are permissible.

c. Tenure

The maturity period of the bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates).

d. 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.

e. Issuance of Bonds

Only the 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.

f. KYC Documentation

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

g. Tax Treatment

The interest on Sovereign Gold Bonds is taxable as per 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 provided with indexation benefits to an individual or when transferring the bond from one person to another.

h. Eligibility for SLR

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

i. Redemption Price

The redemption price must be in rupees, based on an average of the closing price of gold of 999 purity in three previous working days.

j. 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 occurs via recognised stock exchanges (National Stock Exchange of India or Bombay Stock Exchange) directly or through intermediaries.

k. Commission

The receiving offices shall levy 1% of the overall subscription amount as commission for 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 are 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 a 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, then 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 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.

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 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

In short, Gold Sovereign Bonds are new-age investment vehicles for those interested in the gold sector. So, if the above description matches your financial goals, you can go for this.