The Indian government introduced the Sovereign Gold Bond (SGB) scheme in November 2015 to offer investors an alternative to their gold. In addition, it belongs to the category of debt funds.
Over the years, the market has seen a significant drop in demand for physical gold. SGB not only tracks the asset’s import-export value but also guarantees transparency at the same time.
GBS are government bonds and are considered safe. Their value is expressed in multiples of grams of gold. GBS has seen a significant increase in investors, considered a substitute for physical gold. If you are looking to buy an SGB, all you need to do is contact an authorized SEBI agent. Once the bond is redeemed, the corpus (according to the current market value) will be deposited into your registered bank account.
Why should we invest in Gold Bond?
People who are liking gold investments can consider sovereign gold bonds. As a low-risk investment, it is perfect for investors with low-risk appetites. It also gives you a Half-yearly fixed income. Compared to physical gold, the cost of buying or selling SGB is quite low. The cost of buying or selling the Gold Bond Scheme is also nominal compared to physical gold.
Those who don’t want to face the hassle of keeping physical gold safe can also do this. This is because it is easy to archive it in Demat format and nobody can steal it as it is in paper format. So if you are looking for a long-term investment path to get good returns, a gold bond can meet your needs.
Eligibility criteria:
Any Indian resident – individuals, trusts, HUFs, charities, and universities – can invest in Sovereign Gold Bonds (GBS). You can also invest on behalf of a minor.
Denomination / Value:
The value of the bonds is valued in multiples of grams of gold, in which the base unit is 1 gram. The minimum initial investment is 1 gram of gold and the upper limit is 4 kg of gold per investor (individual and HUF). For entities such as trusts and universities, 20 kg of gold is allowed
Maturity Period:
The maturity period of the bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payment dates).
Rate of Interest:
The current interest rate for GBS is 2.50% per year. They are paid twice a year at face value. The return is usually linked to the current market price for gold
Issuance of Bonds:
Only Indian government stocks (on behalf of RBI) can issue gold bonds under the 2006 GS Act. Investors receive a certificate of participation. You can also convert it to a Demat module.
KYC documentation:
You must follow the same KYC (know-your-customer) rules when buying physical gold. Keep KYC documents with you, such as a copy of your driver’s license, PAN card, passport or voter ID.
Tax treatment:
Interest on government gold bonds is taxable under the 1961 IT Act. When SGB is repaid, the capital gains tax applicable to a natural person is exempt. In addition, long-term capital gains receive indexing benefits for one person or when the link is transferred from one person to another.
Eligibility for Statutory Liquidity Ratio:
When banks bought bonds after going through the pledging, hypothesis, or pledging process, they considered SLR. The capital that a commercial bank must maintain before lending to customers is called the legal liquidity report.
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.
Sovereign Gold Bonds Advantages:
- Security
With the exception of market risks, government gold bonds do not include any of the risks associated with physical gold. There are no high design costs or TDS. Therefore, no one can steal it or change its property
- Additional 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.
- Benefits of Indexation
If you transfer your bond before it expires, you will get indexing benefits. There is also a state guarantee for refund money and interest earned.
- Negotiability
Gold government bonds may be traded on a stock exchange by a specific date (at the issuer’s discretion). After five years of investment, you can trade them on the National Stock Exchange or the Bombay Stock Exchange, for example.
- Collateral Security Some banks accept GBS as collateral for secured loans. Therefore, they will treat it as a gold loan after setting the loan/value ratio (LTV) to the gold value. The India Bullion and Jewelers Association Limited determines this.
Compare the GBS to the physical ETF on gold and gold:
| 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 |
| Security | Risk of theft, wear/tear | No Risk of theft, wear/tear | No Risk of theft, wear/tear |
| Purity | The purity of gold always remains a question | High, it is in electronic form | High, it is in electronic form |
| Capital Gains | Long-term capital Gain (LTCG ) after three years | Long-term capital gain post after three years | Long-term capital Gain (LTCG) post three years. (No capital gain tax if redeemed after maturity) |
| 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 |
