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Sovereign Gold Bond Scheme: A New-Gen Investment!

Sovereign Gold Bond Scheme: A New-Gen Investment!


Aditya Hore

Surat: Amid the current abrupt and shocking growth in the prices of gold, everyone is keen to make the most out of it. As the coronavirus pandemic has already hard-hit the economy, gold seems to be a much safer and less risky option to invest in times of such unprecedented crisis. Besides bank-based savings, gold has always topped the list when it comes down to the “most favourite investment option”. Indians in general, possess a profuse love for gold.

In such a condition the Government’s Sovereign Gold bond comes into play. Other than the physical form of gold and Exchange Traded Fund (ETF) one best way to invest in gold is sovereign bonds, linked to the value of gold.

For investors it is advisable to hold at least 5-10 per cent of the assets in the form of gold or gold-related securities.

Let’s understand why gold is high in-demand these days?


Why the Gold?

Gold is looked upon as a hedging instrument in the portfolio as it allows the investors to blindly bet on gold and partially cover up the losses that other investment instruments might ensue during recessions or crises. But that’s not the entire story.

If analysed, during unusual circumstances (like the ones going on at present), gold prices have gone up, and their returns are incomparable to other investment options. Perhaps, gold is considered to be safer for investment as compared to equity. However, historical data says that gold has never outperformed equity (barring a few instances).

Also, people mistake buying jewellery with investing in gold. Jewellery involves making charges and other factors, which take the original cost to the next level. Purchasing gold bars, although it is a form of investment in gold, involves the risk of storing it safely. Keeping them at home is not pretty safe, and bank’s lockers cost you. So, the best way to invest in gold is through Sovereign Gold Bonds.


What are Sovereign Gold Bonds (SGB)?

SGB is an initiative by the Government of India that was started in November 2015. A scheme started under the ‘Gold Monetization’ initiative by the government. The sovereign gold bonds are an excellent substitute for investment in the real physical gold. RBI issues these bonds on behalf of the government of India. For investors it is advisable to hold at least 5-10 per cent of the assets in the form of gold or gold-related securities.

In order to buy these bonds, one needs to pay money to the licensed SEBI broker. Issued by RBI, these bonds are also traded on the stock exchange of India. On the date of maturity, they are redeemed and the cash gets deposited in the registered bank account.

Benefits of opting SGB

SGB is a safe investment as it avails the benefit of the current market price of gold when redeemed or on premature redemption.

Perhaps, only capital amount can be lost and not the gold (since it lacks physical form), if the prices decline. Interestingly, without bearing making /impurity charges while buying, one gets complete benefit of high-profit-margin.

The denomination of the bond is in units of 1 Gram of gold and its multiples. For an individual, the minimum limit for investment in these bonds is 1 gram and maximum four Kgs.

For Hindu Undivided families, the maximum limit for investment is 4 kgs, but for trusts or any similar organizations, the upper limit of investment is 20 Kgs. If they are jointly held, then the first individual shall be given the investment limit of a subscription of 4 kgs.

The rate of interest is 2.5% per annum on the basic nominal value. Half of the interest is paid on a half-yearly basis, and the balance is paid at the time of maturity. The tenure of the bond is for 8 years with exit option in 5th, 6th and 7th year which can be availed on interest payment dates.

The redemption price can be calculated by the simple average of the closing price of gold of ‘999 purity’ of the last three working days as published by Indian Bullion and Jewellers Association Limited.

Indians consume not only fuel in huge amounts, but also gold.  Till 2015, India alone holds more than 24000 tons of gold.  Most of them are imported which is quite expensive. SGB is a way through which the government can cut down the import of gold, ultimately helping in reducing the trade deficit and current deficit.


Beneficial! Right? But what about Key-features?

Apart from the benefits, some key features of the SGBs are that these bonds are issued under section 3 of the Government Securities Act, 2006. The bondholders are issued a Holding Certificate (Form C).

They can also be converted into DEMAT form. Once applied, they are issued on the 2nd business day of the coming week.

Interestingly, the issue price of the Gold Bonds will be Rs. 50 per gram less than the nominal value than those applying online. Using Form F, one can also transfer the bonds.

However, the interest earned on the bonds is taxable under the Income Tax Act, 1961. While incurring any capital gains on maturity, it is totally tax-free.

The investor can also cancel the application until Friday of the week of subscription. However, the investor cannot partly cancel the subscription.

The payment for these bonds is accepted in the case of a maximum value of up to Rs. 20,000 or it can be made through the demand drafts/Cheque/e-banking.

Also, the following documents are required such as Passport, Aadhar Card, Voter’s Identity Card, PAN/TAN.


Important things to be aware of before Investing

The tax treatment is not so favorable if one exists earlier than 8 years. There are 2 ways to exit your bonds. Firstly, the early redemption window that opens at the end of 5 years to redeem bonds.

Secondly, sell it in the secondary market. All gold bonds issued will list on the stock exchanges with a unique ISIN on completion of 6 months from the date of the issue. In both these cases, the capital gains will be taxable. The normal taxation definition of STCG (if less than 3 years) and LTCG (if more than 3 years) will be applicable.

The tax on capital gains will be payable at the peak rate in case of STCG. In case of LTCG, the investor can opt to pay tax at a flat rate of 10 % or he can pay at 20 % after considering the benefit of indexation.


Should you Invest?

Physical gold and other gold-based securities can attract a number of taxes. For gold-related securities, TDS is mandatory. Physical gold, on the other hand, invites a GST of 3% and on selling, exact market price is not acquired.

For a long-term investment avenue, this might be a good option. Buying and selling physical gold is not the same as dealing with SGB.


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