Sovereign Gold Bonds (SGB)
Indians are reputed to hold around 9-11% of the total physical gold in the world. It is estimated that more than 75% of Indian households own gold in some form, spanning across geography and income levels. We are amongst the top consumers of gold globally. For most of us, gold is part of our culture, practices and age-old belief in gold being a good asset class for those bad days. For ages, our ancestors have saved and invested in gold long before any formal investment or saving avenues were available.
Today, gold still continues to be an important asset class for investment. We now have the option to invest in digital gold and not physical gold, saving us from all costs & concerns of security, storage, purity, making charges and so on. Sovereign Gold Bonds (SGBs) and gold ETFs are the available options to buy gold in a digital form. However, SGBs have seen a sharp rise in investors because they are seen as a viable alternative to actual gold and have been actively promoted by the government. In this article, we will dig deeper into this new-age gold investment product called SGB.
What are SGBs?
The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to reduce the demand for physical gold and shift a part of domestic savings for gold into financial savings. SGBs are government securities issued to resident Indian entities by the RBI on behalf of the central government and thus are considered safe. Their value is denominated in multiples of grams of gold. This is a long-term form of market instrument traded on the stock exchange. Investors have to pay the issue price in cash and the bonds are redeemed in cash on maturity, meaning that the maturity will not be in physical gold.
Every year RBI offers SGBs in tranches with new series for limited periods during which time new buyers can buy the SGBs. For instance, Sovereign Gold Bond Schemes 2022-23 - Series IV (tranche), the most recent offering from the government, commenced on March 6 and closed on March 10. This was the final batch of SGBs for the last fiscal year. The issue price for one gram of gold had been set by the RBI at Rs 5,611. Let us now understand some of the fundamentals of SGBs.
Quantity- The Bonds are issued in denominations of one gram of gold and in multiples thereof. Whereas, a maximum limit of subscription for individual and Hindu Undivided Family (HUF) is 4 kg and 20 kg for trusts and similar entities notified by the government from time to time.
Liquidity- The maturity period of SBGs is eight - 8 years. However, the exit in SGBs is possible when the government opens the repurchase window after 5 years. One may sell these SGBs on secondary markets in the event of an early redemption, but doing so would subject him to capital gains tax.
Returns- The returns from these bonds are in the terms of interest and capital appreciation. The returns earned by the price differentiation of gold price is same for physical as well as sovereign gold bonds. However, SGB investors additionally benefit from a fixed interest rate of 2.5% p.a. payable semi-annually in a financial year. Moreover, such gains are over and above the price return of the gold.
Taxation- Both interest income and capital gains are taxed differently. The interest return on these bonds will be added to the total income of an investor. While, in the case of capital appreciation, if a primary issuance bond is redeemed early (post 5 yrs.) or kept until maturity, there will be no capital gains tax to pay. However, the taxation of the SGB bond will be different if the transaction is made on the secondary markets. The tax rate in this case for bonds sold after three years is 20% with an indexation benefit. While, short-term capital gains tax will be assessed on bond sales made before three years, and this tax will be added to the investor's income. TDS is not applicable to SGBs.
Eligibility- Any Indian resident – individuals, Trusts, HUFs, charitable institutions, and universities – can invest in SGB. One can also invest on behalf of a minor. As it is issued in dematerialized form, investors must have a demat account. For investors without a demat account, the government does provide paper certificate choices for investors adhering to the KYC requirements.
Now, one may be curious about how they can purchase or redeem SGBs. So, let us know it how.
How do I buy and redeem SGBs?
Investors have an option to either buy these gold bonds in physical, digital or dematerialized format. The online and offline purchases are allowed through designated post offices, stock exchanges (NSE or BSE) or scheduled banks. There is a discount of ₹50 per gram for investors applying online where the payment is made online.
The investor will be advised one month before the maturity of 8 years and on the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record. As said, early encashment/redemption of the bond is allowed after the 5th year from the date of issue on coupon payment dates. The bonds are traded on exchanges, if held in demat form. It can also be transferred to any other eligible investor.
Benefits of SGBs:
To summarise, SGBs in India offer several benefits for investors, including zero quality risks, no storage costs, no making charges, high liquidity, guaranteed interest earnings, tax benefits and convenience. It can also serve as collateral for loans and carries no default risk. Needless to say, if you are looking at gold as an investment avenue for diversification or as an inflation hedge, investing in the SGB scheme seems like a pretty obvious choice. So if you are interested, keep a watch for the announcement for the next tranche. Till then, share this idea of purchasing this digital form of gold with your spouse and friends too.