Sovereign Gold Bonds: All You Need to Know
For ages, gold has been treated more than a metal. Be it any festival or happy occasions like a birthday or marriage, Indians believe in giving gold as a gift. In addition to being treated as an auspicious metal, gold is also treated as a perfect hedge against inflation. For this reason, gold has always been one of the preferred investment options for Indians. In recent times, due to various safety and storage concerns, people are looking for better investment options than buying physical gold. One of the options is Sovereign Gold Bonds (SGB).
What are Sovereign Gold Bonds?
Sovereign Gold Bonds, abbreviated and popularly known as SGBs, are government-backed securities in gold. The government of India launched these bonds in 2015 under the Gold Monetization Scheme.
These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India and are considered to be one of the most profitable investment schemes. Under this scheme, bonds are assessed in multiples of gram(s) of gold. An investor can start with 1 gram, which is the basic unit, and invest up to a maximum of 4 kg. For trusts and universities, this limit is 20 kg.
These bonds may be considered an alternative to buying physical gold, minus the cost of buying, selling, and tangibly storing bars or coins.
Additional Read: What is a Gold Investment Scheme?
Understanding the Sovereign Gold Bonds Scheme
One of the major benefits of SGBs is the fixed interest that it offers. All investors get a fixed interest rate of 2.5% per annum. This interest is paid every 6 months. This interest is over and above the returns on the gold price and is directly linked to the ongoing price of gold in the market.
Who can invest?
Any person, even minors or in joint name, HUFs, trusts, universities, and charitable institutions can invest in SGBs.
An individual, defined as a resident of India under the Foreign Exchange Management Act (FEMA), 1999, is eligible to invest in sovereign gold bonds. Individual investors who change their residential status from resident to non-resident may continue holding SGBs until early redemption/maturity.
Channels to Buy Bonds
For people looking to invest in SGBs, there are multiple channels to buy these bonds. These channels include post offices, selected banks, and even stock exchanges. Some of the places where investors can visit and buy these bonds are listed below:
- Designated post offices of India Post
- Designated scheduled commercial banks (except small finance banks & payment banks)
- Stock Holding Corporation of India Limited
- National Stock Exchange of India Limited (NSE)
- Bombay Stock Exchange (BSE) Limited (BSE)
The bonds are issued in multiples of one gram of gold and multiples thereof. Therefore, the minimum investment is 1 gram. An individual or a HUF can invest up to 4 kgs, while a trust or similar bodies can invest up to 20 kgs. These limits are subject to revision by the Government of India. In the case of joint holding, this limit is applicable to the first applicant.
Since the price of a gold bond is directly linked to Gold price in international markets, a fall in gold prices results in capital loss. This means an investor might incur a loss if the prevailing price is lower than the price at which the bonds were bought at the time of maturity.
Features and Benefits of a Sovereign Gold Bonds Scheme
Issued by the RBI, on behalf of the Government of India, sovereign gold bonds are bonds issued for 8 years. These bonds are a better option than buying gold coins or gold jewelry. The investor does not have to pay anything as storage charges or making charges.
Some other benefits of sovereign gold bonds are given below:
1. Hassle-free and Convenient
Investing in gold bonds is very simple and transparent. Once the investment is made, the investor gets a holding certificate. There are no making charges, unlike gold jewelry, and unlike physical gold, there are storage charges. Also, there is no risk of gold getting lost or stolen. An investor may hold the sovereign gold bonds in either paper or Demat form.
2. Better Returns
SGBs offer a fixed annual interest rate of 2.5%, paid semi-annually to the investors. This interest is over and above the return on the gold price. It is paid irrespective of the rise or fall in the price of gold.
3. Tax Benefits
Gold bonds bought from the primary market get exemption from capital gain tax if held for 8 years, till maturity. After the fifth year, the investor has to pay a 20% indexation benefit in premature withdrawal.
Sovereign Gold Bonds vs. Digital Gold
Several platforms allow you to invest in digital gold. However, among all these platforms, OroPocket is emerging as the preferred option of smart investors, and not without valid reasons.
OroPocket is one of the best platforms to buy digital gold. The platform is backed by Blockchain technology. Blockchain technology allows investors to verify the integrity of their holdings independently. Not only that, OroPocket believes in offering complete transparency. The customers are charged only a flat transaction fee of 0.25% of the transaction value. Apart from this transaction fee, there are no hidden charges, storage fees, or insurance fees.
OroPocket app uses the latest UPI feature that allows investors to track their holdings in real-time.
If you want to invest in gold but avoid the risk associated with storing physical gold, you have several options like sovereign gold bonds, digital gold, and others. Digital gold offers more returns and more convenience than blocking your funds in SGBs. Hence, compared to sovereign gold bonds, it is a better idea to put your hard-earned money in digital gold.
Frequently Asked Questions
Q1: Are sovereign gold bonds backed by physical gold?
Ans: SGBs are a tool to borrow money from the market. They are not backed by any physical gold.
Q2: Are gold bonds a good investment?
Ans: For investors with a low-risk appetite, it’s a good investment option. The investor may still lose money if the gold prices fall at the time of maturity.
Q3: Can we convert sovereign gold bonds into physical gold?
Ans: Sovereign gold bonds cannot be converted into physical gold. However, if in demat form, they may be traded on stock exchanges.
Q4: Are there any risks in investing in sovereign gold bonds?
Ans: If the market price of gold at the time of maturity of the bond is lower than the price at the time of buying, the investor may incur a capital loss.
Q5: Are sovereign gold bonds worth buying?
Ans: If compared with buying physical gold or gold jewelry, buying SGBs is a better idea as the person saves the cost of making jewelry and safely storing physical gold.
Q6: Can I sell a sovereign gold bond anytime?
Ans: SGBs come with a tenure of 8 years, with a 5 year lock-in period. So, the investor cannot sell before 5 years.
Q7: How is interest paid in sovereign gold bonds?
Ans: SGB investors get a flat interest rate of 2.5%, paid every 6 months.
Q9: Are sovereign gold bonds taxable after 5 years?
Ans: Interest on sovereign gold bonds is taxable as per the provisions of the Income-tax Act. However, the government exempts the capital gains tax on the redemption of SGBs to an individual. The investor gets indexation benefits on long-term capital gains arising to any person on bond transfer.
Q10: Are digital gold and SGBs the same?
Ans: No, digital gold and SGBs are not the same.
Q11: Which is better, sovereign gold bonds or digital gold?
Ans: Though each one has its own benefits, on the whole, digital gold is a better investment idea compared to sovereign gold bonds.