Gold, as a precious metal, doesn’t just carry economic weight in India. It is deeply rooted in our cultural heritage and rituals. Gifting gold, to women especially, has long been used as an alternative investment strategy to provide financial security. Wealth has been passed down in families for generations in the form of physical gold, considered a safe and durable investment instrument.
If you want to invest in gold but don’t want to physically own it, Sovereign Gold Bonds are the ideal investment avenue for you. Introduced by the Government of India in November 2015, Sovereign Gold Bonds are a government-backed gold bond scheme denominated in multiple grams of gold. Gold jewelry is no longer considered a lucrative asset considering 15-20% of its value goes towards making charges. To provide a low-risk opportunity for retail investors to enter the gold market, the Government of India introduced Sovereign Gold Bonds. The gold bonds come with a sovereign guarantee on capital invested. In this case the Government of India is the sovereign. It is a safe investment instrument offering potentially higher returns on your capital than physical forms of gold. They can be held in your demat account or in the form of physical holding certificates.
As time has passed, the focus has shifted from the physical value of gold to unlocking its intrinsic value through other forms of security. Millennials and young investors no longer see gold jewellery, coins, bullion or any physical form of gold as long-term wealth-generating assets when compared with equities or other fixed-return savings instruments.
Sovereign Gold Bonds
If you want to invest in gold but don’t want to physically own it, Sovereign Gold Bonds are the ideal investment avenue for you.
Introduced by the Government of India in November 2015, Sovereign Gold Bonds are a government-backed gold bond scheme denominated in multiple grams of gold. Gold jewelry is no longer considered a lucrative asset, considering 15-20% of its value goes towards making charges.
To provide a low-risk opportunity for retail investors to enter the gold market, the Government of India introduced Sovereign Gold Bonds. The gold bonds come with a sovereign guarantee on capital invested. In this case, the Government of India is the sovereign. It is a safe investment instrument offering potentially higher returns on your capital than physical forms of gold. They can be held in your demat account or in the form of physical holding certificates.
How do SGBs Work?
Before you invest in gold bonds, it is important to know the fundamentals of how sovereign gold bonds work.
- Individuals and entities can invest in Sovereign Gold Bonds. Individuals, trusts, HUFs, charitable institutions and universities can invest in Sovereign Gold Bonds. Investments can also be made on behalf of a minor as well.
- The minimum initial investment is 1 gm of gold capped at 4 kg of gold per investor (individual and HUF) for trusts 20 kg of gold is permissible.
- The tenure of maturity is 8 years, but investors can exit from the 5th year onwards on interest payout dates.
- The interest rate payable is 2.5%, payable semi-annually.
- Sovereign Gold Bonds are held in physical form and can be converted to demat form. The bonds are issued in multiples of 1 gm of gold.
- The bonds are sold through commercial banks, Stock Holding Corporations of India Limited, National Stock Exchange of India Limited, Bombay Stock Exchange Limited and designated post offices (as notified from time to time).
- The bonds can also be purchased online through net banking. All the formalities including nomination details and KYC can be completed online through your netbanking account.
- The price of Sovereign Gold Bonds is calculated on the basis of a simple average of the closing price of gold of 999 purity, declared by the India Bullion and Jewellers Association Limited on the last three working days of the week preceding the subscription period.
- The KYC documents required will be the same as the purchase of physical gold. Your Aadhar card or passport and PAN card are required.
- SGBs have a maturity period of 8 years, and they can also be redeemed prematurely, starting from the 5th year.
Benefits of Sovereign Gold Bonds
- Government-Backed Safety: Sovereign Gold Bonds, issued by the Reserve Bank of India on behalf of the central government, are among the safest investment options in India. They are backed by the government, ensuring zero chances of default on repayment.
- Convenience and Hassle-Free Investing: Introduced under the Gold Monetisation Scheme in November 2015, these bonds aim to simplify gold investments. They eliminate the need for secure storage of physical gold, making the investment process more convenient.
- Secure Holding Certificates: Investors receive holding certificates as proof of their investment, enhancing the security of their holdings. These certificates can also be digitised and stored in Demat accounts for added convenience and safety.
- Long-Term Growth Potential: Sovereign Gold Bonds offer substantial returns over the long term, as gold prices tend to rise. Gold is considered a safe-haven asset during stock market volatility, preserving its value even when stocks underperform.
- Steady Market Demand: Gold is in high demand globally due to its various uses, which keeps its market demand relatively stable, regardless of economic conditions. This stability reduces the risk associated with fluctuations in gold’s intrinsic value.
- Inflation-Beating Returns: Gold prices often appreciate at rates higher than prevailing inflation rates, making it an attractive investment avenue. This allows investors to grow their wealth in real terms over time.
- Long-Term Investment Option: Sovereign Gold Bonds have a holding period of 8 years, making them suitable for individuals seeking long-term investments with significant capital appreciation potential.
- Collateral for Loans: These bonds can be used as collateral to secure loans, with financial institutions offering loans of up to 75% of the market value of the bonds, in accordance with RBI’s Loan to Value (LTV) regulations.
Limitations of Sovereign Gold Bonds
- Inverse Relationship Between Gold Prices and Stock Market: Gold prices tend to move inversely with stock market performance, with stock upturns typically leading to lower gold prices. Even during economic booms, investor optimism in the stock market reduces demand for gold bonds, causing a decline in gold prices.
- Currency Fluctuations Impact on Gold: Changes in currency values, especially the US dollar, can influence gold prices. A stronger dollar can lead to lower gold prices due to increased inflation rates.
- Import Expenses: Rising import costs associated with a stronger currency can reduce a country’s overall investment, affecting the demand for gold and subsequently impacting its prices.
Taxability on Sovereign Gold Bonds
Sovereign gold bonds offer two types of returns:
- Capital gains upon maturity
- Semi-annual interest earnings
Investors who hold the bond until maturity do not incur long-term capital gains tax. However, the periodic interest income is subject to taxation under the Income Tax Act and is taxed according to the applicable income tax rates.
For individuals looking to sell their bonds in the secondary market, they will be liable to pay taxes on any capital gains they realise:
- If the bond is sold before the completion of 3 years, the profits are treated as short-term capital gains and are taxed based on the investor’s annual income tax slab rates.
- In contrast, long-term capital gains are subject to a 20% tax on the total earnings, after adjusting for indexation.
Should You Buy Sovereign Gold Bonds?
Sovereign Gold Bonds are an attractive investment option for various types of investors, particularly those who prioritise safety and are looking to diversify their portfolios.
Risk-Averse Investors:
Sovereign Gold Bonds are an excellent choice for individuals who have a low tolerance for risk. These bonds are backed by the government and offer a secure avenue for investment.
- Unlike more volatile assets like stocks or cryptocurrencies, sovereign gold bonds provide a stable and predictable return on investment.
- Risk-averse investors can benefit from the potential for substantial returns without exposing themselves to the uncertainties of the stock market.
Portfolio Diversification:
Diversifying an investment portfolio is crucial for spreading the risk. Sovereign Gold Bonds can play a pivotal role in achieving this diversification:
- In times of economic uncertainty or stock market downturns, the value of gold tends to rise, acting as a hedge against market volatility.
- By including sovereign gold bonds in their investment mix, individuals can balance their portfolios and reduce overall risk exposure.
- This diversification strategy can help safeguard their wealth and provide stability in turbulent financial markets.
Here are some reasons to invest in Sovereign Gold Bonds
They are an affordable, safe and tax-efficient alternative to holding physical gold as an investment
– They earn a fixed interest (2.50% as of now) while physical gold relies solely on capital appreciation.
– Your investment is safeguarded by the Government of India.
– Gold does not create wealth in the long term, but it is a good way to hedge against market fluctuations, inflation, political upheavals, etc.
– Sovereign Gold Bonds are more tax-efficient than physical gold. Gold falls under the class of non-financial asset which means proceeds from sale of gold under three years will attract short-term capital gains tax. Gold sold after 3 years will attract long-term capital gains tax at 10% without indexation and 20% with benefit of indexation. Sovereign Gold Bondson the other hand are completely tax-free upon redemption. Interest on Sovereign Gold Bonds are taxable according to the tax slab you fall under. If Sovereign Gold Bonds are sold in the secondary market they attract capital gains tax at extant rates.
– Sovereign Gold Bonds guarantee principal redemption and interest payments backed by the Government of India. Additionally, you stand to earn from the appreciation of gold prices. Annual interest ensures that you are protected against any inflation risk.
Fast Facts about Sovereign Gold Bonds
Before you invest in gold bonds, it is important to know the fundamentals of how sovereign gold bonds work.
– Individuals and entities can invest in Sovereign Gold Bonds.Individuals, trusts, HUFs, charitable institutions and universities can invest in Sovereign Gold Bonds. Investments can also be made on behalf of a minor as well.
– The minimum initial investment is 1 gm of gold capped at 4 kg of gold per investor (individual and HUF) for trusts 20 kg of gold is permissible.
– The tenure of maturity is 8 years, but investors can exit from the 5th year onwards on interest payout dates.
– Interest rate payable is 2.5% payable semi-annually.
– Sovereign Gold Bonds are held in physical form and can be converted to demat form. The bonds are issued against multiples of 1 gm of gold.
– The bonds are sold through commercial banks, Stock Holding Corporations of India Limited, National Stock Exchange of India Limited, Bombay Stock Exchange Limited and designated post offices (as notified from time to time).
– The bonds can also be purchased online through netbanking. All the formalities including nomination details and KYC can be completed online through your netbanking account.
– The price of Sovereign Gold Bonds is calculated on the basis of a simple average of the closing price of gold of 999 purity, declared by the India Bullion and Jewellers Association Limited on the last three working days of the week preceding the subscription period.
– The KYC documents required will be the same as the purchase of physical gold. Voter ID pan card or Tan card and passport are required.
– The Department of Economic Affairs has declared that in the year 2021, 6 tranches of Sovereign Gold Bonds will be issues from May to September 2021
It is important to note that gold investments should constitute only 5-10% of your investment portfolio. You should benefit from the capital appreciation of gold but the movement of prices of gold is often unpredictable and doesn’t offer a high enough return to channel all your savings into. Gold investments buttress your portfolio in time of geopolitical instability, a global health crisis, war or any other type of economic unpredictability. Gold bonds have the benefits of owning physical gold, such as their use as collateral for loans and capital appreciation without expenses such as storage costs, long term capital gains tax (if redeemed after 8 year maturity period) and the flexible to trade freely on secondary markets or with the government (after the 5th year).
