Is Sovereign Gold Bond Worth For Investment?

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Have you ever thought of investing in gold bonds? Well, it’s time to know the importance, benefits, and need of investing in these bonds to make a bright future. The mentality that prevails in the common investor’s mind is these investments’ security, reliability, and profitability. As in the world of industrialisation, it is hard to predict the future livelihood of even a common investor. Hence, only reliable facts and figures would be considered to ensure that all the doubts are cleared while investing. Investment in gold bonds seems somewhere difficult for regular investors, and making up their minds is the most challenging aspect. It can earn not only interest but also the potential capital appreciation of the investment. In common words, Sovereign Gold Bonds (SGBs) allow an individual to hedge the investment portfolio smarter. Investing in SGBs is a better and more reliable alternative than in physical gold, as the risk- costs associated with holding physical gold are eliminated. Let’s understand the concept briefly.

What Are The Sovereign Gold Bonds (SGBs)?

India and its citizens’ love of gold are known worldwide. It holds and connects an emotional value for every individual and is traditionally passed down generations due to its festive consideration. Besides, gold symbolises wealth and holds religious significance in the books of Indian culture as a mark of Goddess Lakshmi. This is the reason why India is the second-largest consumer of gold, right after China. Today, other than buying physical gold, i.e. jewellery, bars, and coins, one can also explore the smarter options to invest in gold, not just a just but Sovereign Gold Bonds (SGBs). The fact that holding physical gold accompanies its own set of risks and costs. Hence, the Government of India introduced the concept of Sovereign Gold Bonds (SGB) in November 2015. Now, let’s understand what this means.

Sovereign Gold Bonds (SGBs) are issued by the Reserve Bank of India (RBI) on behalf of the government at the issue price. They are issued in denominations of one gram of gold and multiples thereof. The maturity period for SGBs is eight years and carries half-yearly interest payments based on the coupon rates, having an exit option at the end of the fifth year that should be exercised on the interest payment date. They are tradable on the stock exchange, and until five years, investments in SGB are to be locked-in.

Fixed rate of interest incurred while investing in these SGBs. Since the Government of India regulates and supports them, they are considered safe and secure. The interest incurred from these bonds is 2.5% per annum, which is over and above the capital gains from the investment. The interest payments are made every six months, as per the rules. Gold Bonds are fully transparent, keeping the facility to track the import-export value of the gold. They are denominated in grams, and investors can purchase them in grams. The minimum investment in SGBs is one gram, and the maximum is four kg for individuals and Hindu Undivided families (HUF). However, for trusts and organisation-related entities, 20kgs is the maximum investment. 

The Sovereign Gold Bonds in India are sold at the last three days’ simple average of the closing price of gold of 999 purity preceding the subscription period. The gold prices will be the ones published by the India Bullion and Jewellers Association Limited, and they will be denominated in INR.

Tax On Early Redemption- Know Why?

The taxation of Sovereign Gold Bonds remains a little unclear and puts the person in confusion at the moment. Although the rules are prescribed on the taxation of capital gains dealing with the bonds’ redemption after maturity, ambiguity is still witnessed if the bonds are redeemed before their due date. Also, there is clarity on Tax Deducted at Source (TDS) interest tax incurred on SG Bonds. The Sovereign Gold Bonds earned interest will be taxable as ‘Income from Other Sources’ (IFOS), while TDS is not applicable on the bond.

As per the rules (Section 193), the capital gains tax arising on redemption of SGB to an individual has been exempted. Transfer of Sovereign Gold Bond (SGBs) denominated by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, on redemption by an individual is not regarded as a taxable event and hence will not be considered tax. The law exclaims on ‘Transfer by way of redemption. As per officials, there wasn’t a separate provision for redemption before and after maturity. Early encashment of the bond is allowed after the fifth year from the date of issue on coupon payment. At times of premature redemption, investors can approach the concerned bank or Stock Holding Corporation Of India Limited (SHCIL) offices thirty days before the coupon payment date. One can invest in SGBs through any SEBI registered agent and all the transactions that take place electronically, being the eye-keeper on every mishap. The purchase, interest accumulation, and redemption are routed through the investor’s bank account.

Why Is It Beneficial To Invest?

The core factor that the investor finds is safety. It holds huge importance; thus, while investing in Gold Bonds, investors make sure to grab all the information for safety purposes. SGBs are not subject to any kind of risk with holding physical gold, except the market risk manipulation. The bonds do not have designing charges or TDS as no one can steal or change the investor’s ownership. 

Besides, an individual can also think of earning additional income other than the regular one as these Bonds render an annual interest of 2.5% breaking it into twice a year. If anyone plans to sell it in the future, he can earn appreciated capital value from them due to inflation and increasing demand. To prevent any fraud, the investor can avail of it through a Demat account as it is digitalised and regulated under SEBI. These bonds will be held on RBI’s own till it is converted into the digitalised format. The only need is to fill out the request application for the conversion. Like shares and debentures, it is traded on the stock exchange (BSE, NSE) to make them easy accessibility for their investors. 

Also, if the loan is needed for a purpose, these Sovereign Gold Bonds can act as collateral against the loan, which could easily help in granting loans by banks or other financial Institutions. These Bonds can be bought with the help of the following entities.

  • Nationalised Banks
  • Scheduled Private and Foreign Banks
  • Designated Post Offices
  • Stock Holding Corporation Of India LTD. (SHCIL)
  • Authorised Stock Exchanges

Above all, the risks associated with the physical handling of Gold can be risky and cost-affecting compared to Sovereign Gold Bonds. The incidents like theft and high storage of costs can be the core factors affecting physical handling. Selling of theft Gold Bonds through unregistered entities must be avoided. Thus, it is recommended to have a proper consultancy before any steps are taken. If an individual is willing to buy such bonds, he must consult with SEBI registered Brokers or agents for the same.

Make your Gold a Digitalised Asset!

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