What are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are government-backed securities issued by the Reserve Bank of India (RBI), representing gold in digital or paper form. Instead of purchasing physical gold, investors buy these bonds, which offer returns linked to the market price of gold along with an annual interest payout. SGBs are a safe and less costly alternative to holding physical gold, the hassle of storage and purity is also eliminated through SGBs. The investors are further exempt from paying capital gains taxes upon maturity of the bonds, and thus, it becomes an excellent avenue for long-term investment.
Key Takeaways
- SGBs are a safer and cost-effective alternative to physical gold, with an 8-year maturity and exit options after 5 years.
- While owning physical gold may be rewarding, SGBs are better on the rewards front, with an additional fixed interest rate of 2.5% per annum apart from gold price appreciation.
- The tax benefits include exemption from the head of capital gains arising upon redemption after maturity and no TDS on interest earned.
- SGBs are liquid and tradable at exchanges like NSE/BSE, thus allowing flexibility and convenience of investment.
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Sovereign Gold Bond Meaning
Sovereign Gold Bonds serve as a convenient alternative to holding physical gold. These bonds are denominated in grams of gold, whereby investors own gold without worrying about storing or purity issues. Issued by the government, the SGBs usually have an 8-year tenure with an option to exit after the fifth year. The returns to investors also include a fixed interest rate on the principal investment, in addition to the appreciation in the value of gold. In case the investors hold the bonds to maturity, these are redeemed at redemption price and that shall be based upon the simple average of the closing price of gold of 999 purity of the previous three business days from the repayment date as published by the India Bullion and Jewellers Association Limited. Another plus point: tax benefits include exemption from capital gains tax upon redemption, which makes SGB one of the best ways to invest in gold with safety. Now that you have learned what a sovereign gold bond is, let’s see further benefits and risks associated with it.
Benefits of Sovereign Gold Bonds
SGB offers several benefits, below are the benefits of sovereign gold bonds:
- Complete Safety: Except for market risks, there is no other risk from holding physical gold in the case of Sovereign Gold Bonds. There are no high making or wastage charges. Another added attraction of SGBs is that they bear interest whereas holding physical gold does not yield interest for the metal holder at all.
- Additional Income: The current fixed rate of 2.50% assures the payment of annual interest with certainty to investors on the issue price of the securities.
- Indexation Benefit: An investor, by transferring the bonds eligible for indexation benefits, can benefit from long-term capital gains. Both the principal amount and the interest earned are backed by a guarantee from the government.
- Tradability: Gold sovereign bonds can be traded on stock exchanges within a specific timeframe (determined by the issuer). For instance, you can trade them on the National Stock Exchange or Bombay Stock Exchange after five years of investment.
- Collateral for Loans: Some banks allow SGBs as security or collateral when availed in a Demat form against loans sanctioned. They treat it as a gold loan after adjusting the LTV (Loan to Value Ratio) as per the value of gold, as per the guidelines from India Bullion and Jewellers Association Limited.
Risks Associated with SGBs
If the market price of the gold goes below the cost price, there arises a chance of loss. This, however, is not a particular risk in the form of SGB gold investment. This is related to the general form of investment.
However, there is an assurance from the RBI that the investors face the loss pertaining to the quantity of gold allotted to them.
Who can Invest in Sovereign Gold Bond Schemes?
The schemes of Sovereign Gold Bonds offer investment opportunities in gold to a broad array of investors in a convenient manner, since there is no hassle of physical holding of the metal. These bonds are available for individuals, Hindu Undivided Families, trusts, universities, and charitable institutions to meet their investment requirements across segments.
It also opens the window for resident and non-resident Indians to diversify their investment portfolios and thereby benefit from the appreciation of gold prices in India. SGB is one of the most convenient and safe ways of holding gold, as it eliminates concerns about storage, safety, and transportation.
Additionally, investors can take part in the gold market by investing in the SGB schemes with less stress of carrying the yellow metal physically, while having the benefit of periodic interest payment, traceability in stock exchanges, and the advantage of tax exemption if held to maturity.
Why Choose SGB over Physical Gold?
Here are four key reasons why opting for an RBI Sovereign Gold Bond is a better choice than buying physical gold:
In the case of SGBs, the price of gold is determined by the India Bullion and Jewellers Association Limited and hence uniform across the board. When one buys physical gold, apart from the price of gold, one ends up paying exorbitant making charges, over and above the basic price of gold. In the case of SGBs, no such extra charges are payable, and hence the overall cost of acquiring an SGB is lower compared to physical gold ornaments.
When you buy physical gold, your earnings come solely from its appreciation. But with SGBs, you benefit from two sources – the rising value of gold and the interest rate paid on the bonds. At maturity, you receive the appreciated value of gold tax-free, along with the non-cumulative interest earned over time, of which only the interest is taxable.
Storing physical gold securely is your responsibility, often requiring the use of lockers or safes at financial institutions. With SGBs, being paper or digital assets, there’s no need to worry about storage. Even if you lose your SGB documents, you can simply contact the RBI to get a duplicate copy.
SGBs are issued by the RBI on behalf of the Government of India, offering a sovereign guarantee on both interest and repayment of principal. That simply suggests that the government would ensure you get your returns without any delay at maturity, making SGB one of the safest options for gold investment.
Conclusion
Sovereign Gold Bonds (SGBs) offer a secure and cost-effective way to invest in gold without the challenges of handling physical gold. With a dual privilege of appreciation in the gold price and annual interest, SGBs turn out to be an attractive option for investment, more so for diversification with the least risk. Added advantages like tax exemptions, easy tradability, and governmental support make SGBs an attractive substitute for physical gold. Whether an experienced investor in the gold market or a new entrant, SGBs are a reliable, convenient avenue for long-term wealth appreciation.
FAQs on Sovereign Bonds
SGB is a good investment that provides a return of a fixed interest rate of 2.5% on the principal, hence more lucrative than physical gold. They are ideal for long-term growth with an 8-year maturity and an exit option after 5 years. They also offer easy tradability on NSE and BSE. SGBs are low in cost and have tax efficiency: no TDS on interest and capital gains tax exemption on redemption.
SGBs and FDs are excellent avenues for conservative investors. SGBs, launched as part of the Gold Monetisation Scheme, offer an alternative to FDs for investors. The better option depends on an investor's long-term financial goals.
Yes, you can. SGBs are available for purchase from the stock exchange at any time from the BSE or NSE. An online purchase of these bonds is accustomed to avail the entity purchasing them for Rs.50 less than the nominal price.
The maturity period for the Sovereign Gold Bonds is 8 years. However, one can prematurely redeem it from RBI after the completion of 5 years on payment of interest dates.