Sovereign gold bonds are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. This sovereign gold bond scheme is offered in increments of one gram of 999.9 fine gold, with the value of each unit determined by the gold’s weight in grams. An average gold price at the end of business on the last three trading days before the subscription period is used to set the pricing. The India Bullion and Jewellers Association Limited (IBJAL) publishes the last prices of the day. The discounted price is calculated using the same most recent base data. A sovereign gold bond is convenient to invest in and keep track of thanks to its low interest rate of 2.5% per year, paid semi-annually. In a given fiscal year, an individual may only buy up to 4 kilograms, whereas a trust can buy up to 20 kilograms. No investment in SGBs may be made without a valid PAN card.
How does SGB work?
- The RBI issues multiple tranches of SGBs throughout the fiscal year. Banks, brokers, the mail, and the internet are where one may purchase these assets. To entice traders to purchase SGBs over the internet, a discount of INR 50 per gram is offered.
- Remember that every year the RBI issues a brand new series of SGBs for purchase by the public. If you have yet to receive the most recent issue, you can always hear when the next one will be released.
- The bonds can be purchased in paper form, electronically, or both electronically and physically. Purchasers of these bonds can have their Demat accounts credited with ownership upon request. RBI will then keep the bonds in their records while dematerializing them.
- Following allocation, dematerialization can also take place. Those who don’t want to buy units from the RBI directly can do so on the secondary market, which consists of stock exchanges.
What are the benefits of investing in SGB?
- People looking to buy gold only on financial grounds may wish to explore SGB. SGBs protect both the gold’s purity and the safety of their investors.
- Because these bonds are digital and stored in the investor’s Demat account, they may reduce the need for physical storage of gold, which may be costly.
- The 2.5% interest rate makes this alternative attractive since bondholders get a passive income stream based on their gold holdings, unlike physical gold.
- In the current economic climate, these bonds would make wonderful gifts.
- Since there are no taxes on the capital gain at maturity, these bonds are good for long-term investors.
Risks associated with SGB
- Loss potential exists if the gold market price exceeds gold’s cost. Investing in sovereign gold bonds is not immune to this risk or any other type of investment.
- The RBI assured investors that they would never shed more gold than they were given.
What should you know before investing in SGB
Exit Options & the Risks Involved
The tenor of the series is fixed at eight years from the date of issuance, raising questions about the RBI’s early redemption option after five years. It is possible to cash in a coupon on the day it is paid. A month before the coupon payment date, investors only need to contact the appropriate bank, post office, or agent. And they may always redeem some of their stock (the minimum quantity being one gram). Bondholders’ accounts are promptly credited with the redemption amount.
These bonds can be bought and sold on stock exchanges through demat accounts if kept in demat form. However, the price at which bondholders can sell their notes will depend heavily on the liquidity of the particular series.
An individual’s understanding of taxes is crucial before making a sovereign gold bond investment. The government of India created SGBs so its citizens could more easily invest in gold. It provides a unique tax benefit. Under the sovereign gold bond program, the bond matures in eight years. Although there is no taxable gain on the maturity amount, there may be a taxable gain on any sale before maturity, depending on the time the investment was held.
It should be noted that the tax exemption applies to bonds acquired through the stock market, which is considered a secondary market. If you buy a sovereign gold bond on a stock exchange, the deal is considered a transfer instead of a redemption, and you become the new bondholder. When the bond matures, you will receive a tax-free payment.
But if you sell a bond before it matures on a stock exchange, you’ll have to pay capital gains tax on the profit. These short-term payouts will be added to your yearly income and taxed at your regular rate.
Long-term capital gains (LTCG) are realized when an investment is held for four years or more. This benefit is subject to a 20% tax rate with indexation benefits and a 10% tax rate without them.
There is a 2.5% annual interest rate attached to these bonds. Each installment is due every six months. The interest accrued on this sum is exempt from withholding. When your taxable income is subject to taxation, it is taxed at the rate specified by your tax bracket.
The third benefit of purchasing SGBs is that they can be used as collateral for loans. The fact that banks are willing to take SGBs as collateral lowers the cost of loans and helps people who would otherwise buy physical gold to protect themselves from economic uncertainty.
The loan-to-value (LTV) ratio is similar to that used in conventional gold loans, so investors can be reassured that the product will be liquidated before its time. Like loans secured by deposits, the financial institution that receives the sovereign gold bond loans it without keeping any interest revenue for itself. Instead, it sends it on to the true beneficiary.
SGBs are developed to facilitate gold investment. Although it is not designed for trading, there are tax benefits at maturity. That’s why most people who invest in these bonds do so for the long haul. SBG’s low trading volume on the stock market is further proof of this. It’s important to weigh the pros and cons of investing in SGBs before buying any, whether through the stock market or during the issuance period. Those interested in purchasing a sovereign gold bond can do so through the stock market at a discount. Remember that SGBs are a great way to diversify your holdings and add gold to your portfolio. But before you put money into them, make sure you know everything there is to know about them by consulting Piramal Housing. They are one of the best financial institutions.