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A beginner’s guide to investing in Sovereign Gold Bonds

  • Akshatha Sajumon
  • Jan 12 2022
  • 8 minutes
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Sovereign gold bonds were first introduced by the Government of India back in 2015 as part of the Gold Monetization Scheme. Under this scheme, the bond issues are offered in tranches by the Reserve Bank of India on behalf of the government. These bonds are an ideal alternative to gold investment in physical form. Investors are attracted to this investment form primarily because of the benefit of potential appreciation in gold prices. Sovereign gold bonds have a fixed interest of 2.5% which is paid semi-annually on the invested amount. 

Here are some important details on sovereign gold bonds for first-time investors who are looking to explore this form of investment.

What are Sovereign Gold Bonds?

The Indian market has witnessed a significant decline in the demand for physical gold. According to statistics, India’s gold demand is said to have dropped by 35.34% in 2020 alone. With the aim to offer an alternative to physical gold, the Government of India introduced the Sovereign Gold Bond (SGB) Scheme. These are part of the debt fund category. 

Sovereign gold bonds are certificates issued by the RBI against grams of gold. These allow individuals to invest in gold without the hassle of keeping the physical gold safe. Since gold prices are not severely impacted by market fluctuations, Sovereign gold bonds make for a secure investment tool. These are considered as prospective investment avenues because of the popularity and demand for gold which results in a significant price rise over time.

SGB value is denominated in multiples of gold grams. Since these bonds are issued by the RBI within the umbrella of Government of India stocks, there is a pre-decided window for the subscription. During this time period, a sovereign gold bond scheme is issued by RBI in tranches. The RBI normally announces the issuance of fresh sovereign bonds through a press release every 2-3 months. It provides a week-long window during which investors can subscribe to the scheme.

Who should invest in SGBs?

Investors who are looking to diversify their portfolio with exposure to gold can consider investing in Sovereign Gold Bonds. Since this is a low-risk investment, it is ideal for investors who have a low-risk appetite. It also provides a fixed income semi-annually. Investors don’t have to spend a lot on this investment since compared to physical gold, the cost of SGB purchase/sale is low. Investors who want to avoid the hassle of safeguarding physical gold can opt for this form of investment, as these can be easily stored in Demat form. 

Why should you invest in SGBs?

There are many advantages of investing in sovereign gold bonds. Some of the major reasons to invest in gold bonds are as below:

  • Investors can use these bonds as collateral against loans.
  • Sovereign gold bonds attract a fixed annual interest rate of 2.5% on the issue price. 
  • To purchase these bonds, payment can be made in cash. It is allowed up to a maximum of Rs. 20,000. Investors can also use demand draft, cheque, or e-banking for making the payment.
  • These bonds can also be converted into DEMAT form.
  • Gold bonds act as security since these are issued as Government of India stock.
  • These can be traded on a stock exchange after completion of the stipulated time period, which is approximately 5 years from the time of investment.

Are there any drawbacks of Sovereign Gold Bonds?

Before investing in sovereign gold bonds, investors must know the drawbacks of this form of investment. Here are some important points to note:

  • Inverse Correlation to the Stock Market – Gold prices have a tendency to be inversely correlated to the stock market movements. Historically, an upturn in stock market returns has often seen a reduction in gold prices. When the economy is seen to be doing well, investors gain an optimistic approach towards the stock market since they expect good performance from the companies in response to rising aggregate demand. Thus, demand for gold bonds drops, resulting in a drop in the market prices.
  • Impact of Currency Fluctuations – Currency value fluctuations also have an impact on the price at which gold is traded. If the benchmark currency (i.e. the US dollar) appreciates, it causes gold prices to fall because of the consequent rise in inflation rates. As the import expenditure of a country rises, the net investment falls, leading to an impact on the demand for gold and therefore its prices.

How is tax calculated on Sovereign Gold Bonds?

Returns on Sovereign gold bond can be broadly classified into the following two categories:

  1. Capital gains earned at the time of maturity of a bond 
  2. Interest earnings disbursed semi annually. 

Investors who choose to retain the bond throughout its term do not have to pay long-term capital gains tax. However, interest income is taxable under ‘Income from other sources,’ and tax rates applicable are as per the respective income tax slabs in the financial year.

Investors who wish to resell these bonds in the secondary market must pay tax on realised capital gains, if any. Resale of these bonds within 3 years from the investment date attracts short-term capital gains tax on total profits. The tax rates applicable are as per the annual income of investors. Long-term capital gains attract a 20% tax rate applied on the total earnings after accounting for indexation.

Sovereign Gold Bonds vs Physical Gold

For investors who are not sure between investing in physical gold or gold bonds, here are some differentiating points:

Category Sovereign Gold Bond Physical Gold
Safety of Asset High Risk of theft and regular wear/tear depending on storage conditions
Investment Returns  Higher than physical gold returns Lower due to deduction of making charges
Purity Since these are in electronic form, the investment can be considered as pure form Difficult to determine at times
Tradeability Can be traded after completion of 5 years of investment Can be bought and sold through traders or commodities market
Tax LTCG after three years. (Capital gain tax is not charged if bond redeemed after maturity) LTCG after three years

Conclusion

Investors can consider buying sovereign bonds after carefully analysing personal financial goals and investment tenure. This is because sovereign gold bonds involve considerable investment, which gets locked in until the investor can realise future returns. Investors must regularly follow the RBI’s website to successfully subscribe to sovereign gold bond issues.


Frequently Asked Questions

Where do I get the application for SGB?
The application form for sovereign gold bonds can be availed from issuing banks, designated Post Offices, or through agents. It is also available for download on RBI’s website. Issuing banks that are authorised by RBI can also provide an online application facility to applicants.

Can a minor invest in SGB?
Yes, minors are eligible to invest in SGB. The application for a minor has to be made by his/her guardian.

Is there any risk involved in investing in SGB?
There could be a risk of capital loss in case the market price of gold falls. However, an investor does not lose the units of gold that have been paid for.

Can I apply for SGBs online?
Yes, SGB application can be made online by visiting the designated bank’s website or downloading the form from the RBI website.

Can I invest in Sovereign Gold Bonds using a DEMAT account?
Once you purchase the bonds, these can be held in your demat account. You need to make a request for the same while furnishing the application form. In case the process of dematerialization has not been completed, the bonds will be held in RBI’s books. 

Can Sovereign Gold Bonds be traded?
Yes. The bonds are tradable on stock exchanges if they are held in de-mat form with depositories. Investors can trade these as per RBI guidelines.

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