Individual investors have found Sovereign Gold Bonds (SGB) backed by the Indian government to be a viable investment choice since late 2015. Gold Bonds were created to allow investors to participate in the movement of gold prices without having to go through the inconveniences of purchasing and selling physical gold. Sovereign gold bonds have several unique characteristics that aren’t found in other gold investments. This is why:
When compared to real gold, having gold in the form of sovereign bonds makes a lot more sense. Each time you alter the type of gold in which you buy and sell jewelry, you lose 15-20% in making charges. Gold is also available in the form of gold bars and coins. Physical gold, on the other hand, has a cost in terms of storage, insurance, and security. SGBs can be held as physical certificates or in a demat account. In SGBs, the problems of gold management and translation loss are substantially avoided.
Although gold ETFs can also be kept in demat form, there is a cost associated with gold ETFs. Gold ETFs are typically purchased at the current unit price of gold, but there is a transaction cost each time you enter and exit. In addition, the annual AMC fee of 1% is deducted from the NAV of your gold ETF. SGBs, on the other hand, are not burdened with such charges. On the contrary, the government typically issues gold bonds at a discount to the average market price, providing an added benefit.
From the investor’s perspective, this is a critical point. There is no guaranteed income whether you own gold in physical form or in the form of an ETF. You only profit if the price of gold rises in the market. The SGB, on the other hand, pays 2.50 percent yearly interest to investors. Although this is a reduction from the 2.75 percent interest previously offered, it is still a fantastic method to put your idle gold deposits to work. At the very least, you are partially compensated for the risk of inflation each year. In the meantime, if gold prices rise, you will profit from the increase. The interest payments and principal redemption are both guaranteed by the Indian government, hence these bonds are risk-free.
One thing to keep in mind concerning Sovereign Gold Bonds is that they are taxed more efficiently than actual gold. Let’s look at the capital gains tax implications of SGBs. Because gold is considered a non-financial asset, capital gains are calculated based on a three-year holding period. If you sell your gold within three years, you will be subject to short-term capital gains tax at the highest rate that applies to you. Long-term capital gains are defined as sales of gold after a period of three years. It will either be taxed at a rate of 10% without indexation or at a rate of 20% with indexation. In the event of SGBs, gold bond redemption will be completely tax-free in the investor’s hands. (Gold bonds have an 8-year term and can be redeemed after a 5-year period.) If SBGs are sold in the secondary market, however, they will generate capital gains at current rates. Interest on SGBs is taxable at your applicable tax rate, just as regular interest receipts.
SGBs are a more efficient, profitable, and cost-effective way to hold gold than real gold. SGBs are not only a profitable asset that pays interest, but they also come with the assurance of a sovereign guarantee.
When there is economic volatility, geopolitical uncertainty, or a depreciation in the value of fiat currencies, gold tends to outperform other asset classes. At this point in time, we can see hints of all three in the global economy. Take a look at Syria, Afghanistan, North Korea, and Europe’s political turmoil. Gold is seen as a safe-haven investment in these uncertain times, and as a result, there is a lot of demand for it. This is something that an investor should bear in mind.
Finally, any decision to invest in gold should be considered in the context of your total portfolio mix and long-term objectives. An exposure to gold of 8-12 percent in your portfolio is typically recommended to provide a safety net for your portfolio in unpredictable times. However, unlike equities, gold does not generate long-term wealth. That should be the overarching principle that guides your gold investment decision.
Is it wise to invest in gold bonds?
In comparison to physical gold, the cost of purchasing or selling the SGB is also minimal.
SGBs are a good option for those who don’t want to deal with the headaches of storing actual gold. This is due to the fact that it is simple to store in Demat form, and no one can steal it because it is in electronic form.
What is the purpose of gold bonds?
Sovereign gold bonds, or SBGs, are gold bonds issued on behalf of the Indian government by the Reserve Bank of India (RBI). The gold in this bond is sold on a unit-by-unit basis, with each unit’s value deriving from underlying one gram of 999 quality gold. The price is established by averaging the closing gold prices for the three working days before to the subscription period. The India Bullion and Jewellers Association Limited publishes these closing prices (IBJAL). The redemption price is based on the same source’s most recent base data.
SGBs are simple to buy and manage, with a period of eight years and an annual interest rate of 2.5 percent paid half-yearly. Individual purchases are limited to 4 kilograms every financial year, and trust purchases are limited to 20 kilograms. A PAN card is the only document required for the purchase of SGBs; without it, no investment in these bonds is possible.
Is it wise to invest in gold or gold bonds?
Gold bonds have a higher return than real gold (gains plus an additional 2.75 percent fixed interest per year), are less expensive (no fees or expense ratio), and can be kept in certificate or demat form. The only significant disadvantage is their lack of liquidity. You can only leave after the fifth year.
Is a gold bond better than a government bond?
SGB and FD investments are both low-risk, but they operate differently. Fixed deposits offer a lower rate of return than gold bonds, but the benefit is that your money will be safe from market swings. Sovereign gold bonds provide better returns, but they are also susceptible to market volatility. You must decide what to invest in based on the level of risk you are willing to accept. It’s a good idea to make sure your investment fulfills your financial objectives.
What happens if a sovereign gold bond is held for eight years?
New Delhi, India: The Reserve Bank of India (RBI) announced earlier this week that the deadline for premature redemption of the Sovereign Gold Bond (SGB) Scheme is today (Wednesday, 17 November 2021).
Despite the fact that the tenor of the Sovereign Gold Bond is eight years, early encashment/redemption is permitted on coupon payment dates after the fifth year from the date of issue. If kept in demat form, the bond will be tradable on exchanges. It can also be transferred to another investor who meets the criteria.
What is the 2021 Gold Bond Scheme?
Series VIII’s issue price was Rs 4,791 per gram, and it was available for subscription from November 29 to December 3 last year.
The bond’s price is determined in Indian rupees using a simple average of the closing price of 999-purity gold published by the India Bullion and Jewellers Association (IBJA) for the last three working days of the week prior to the subscription period.
The bonds are denominated in gram(s) of gold multiples, with one gram as the fundamental unit. The bond will have an eight-year tenor, with an exit option after the fifth year that can be utilized on the next interest payment dates.
The minimal investment is one gram of gold, with a maximum subscription limit of four kilograms for individuals, four kilograms for HUFs, and twenty kilograms for trusts and similar companies per financial year (April-March).
The sovereign gold bond plan was introduced in November 2015 with the goal of reducing physical gold demand and shifting a portion of domestic savings formerly used to buy gold to financial savings.
Nish Bhatt, Founder and CEO of Millwood Kane International, commented on the sovereign gold bond plan, saying, “SGB is a cost-effective approach for investors to gain exposure to gold. There are no storage fees or taxes, like there are when purchasing actual gold. Paper gold has a higher redemption value and is more easily redeemed for loans. The SGB comes with a 2.5 percent coupon and a tax benefit for investors.”
He went on to say that the scheme has been a major success for the government, with over Rs 32,000 crores raised since its launch in 2015.
“Gold prices are currently trading near a two-month low. Gold prices are around Rs 9000/10 gm lower than they were in 2020. “The decline is primarily attributable to the US Federal Reserve’s minutes, which showed a faster rate hike and a drop in bond buying than previously projected,” Bhatt said in a statement.
The rate at which global central banks unwind their monetary positions, as well as the movement of the US dollar, will dictate gold prices in 2022, he said.
In 2021, how do you get a sovereign gold bond?
4) Where to Purchase Sovereign Gold Bonds
Individuals can purchase gold bonds directly or through agents through commercial banks, the Stock Holding Corporation of India Limited (SHCIL), RBI-designated post offices, and recognized stock exchanges.
5) Discounts on Sovereign Gold Bond Schemes
Customers can apply online at one of the mentioned scheduled commercial banks’ websites. For those investors who apply online and pay via digital means, the issue price of the gold bonds will be $50 per gram less than the nominal value.
6) Investing on Sovereign Gold Bonds
The bonds are available in one gram and multiples of one gram gold denominations. The minimum investment in gold bonds is one gram, with a maximum subscription limit of four kilograms for individuals, four kilograms for Hindu Undivided Families (HUF), and twenty kilograms for trusts and similar institutions. The limit applies to the first applicant in the case of joint holding, the central bank clarified.
7) Interest on Sovereign Gold Bonds
The bonds’ interest rate is set at 2.50 percent per year. The investor’s interest will be credited semi-annually to his or her bank account, and the final interest will be paid along with the principle at maturity. The interest is taxable under the Income Tax Act of 1961 (43 of 1961). When the sovereign gold bonds are redeemed, there will be no capital gains tax.
8) Maturity Period of Sovereign Gold Bonds
The bond has an 8-year maturity. The RBI stated that both interest and redemption revenues will be credited to the bank account provided by the consumer when the bond was purchased. On coupon payment days after the fifth year from the date of issue, the banks allow early encashment or redemption of the bond.
9) Allotment Status of Sovereign Gold Bonds
The consumer will receive the allocation if he or she matches the qualifying conditions, provides a valid identification document, and pays the application fee on time, according to the bank.
10) Tax on Sovereign Gold Bonds
The interest you earn on Sovereign Gold Bonds is taxable in the tax bracket in which you live. There is no TDS or Tax Deducted at Source, though. “These gold bonds have an eight-year maturity duration with an early exit option after five years. Sovereign Gold Bonds’ capital gains are completely tax-free when they reach maturity. If you sell Sovereign Gold Bonds on the secondary market before they mature, the capital gains are taxed in the same way as real gold or Gold ETFs are “ClearTax’s founder and CEO, Archit Gupta, described the situation.
Is SGB made of 24 karat gold?
On Monday, October 25, BI’s Sovereign Gold Bond (SGB) plan 2021-22 – series VII goes live, and will run through October 29. Investors will be able to invest in the RBI SGB scheme for the next five days, with the issuance date set for November 2, 2021. SGB VII’s issuance price has been set at Rs. 4,765 per gram. The bond’s nominal value will be determined by the simple average closing gold price for gold of 999 purity reported by the India Bullion and Jewellers Association Ltd (IBJA) for the last three working days of the week preceding the subscription period. The Sovereign Gold Bond (SGB) is a virtual form of 24 carat gold investment.
What are the advantages of the gold bond scheme?
If you invest in gold coins and bars, you’re squandering a golden opportunity to make a lot of money. There are gold bonds on the market that allow you to profit from price fluctuations while still paying a fixed interest rate, similar to bank fixed deposits. A sovereign gold bond is a low-cost, high-quality alternative to purchasing actual gold. Let us explain why gold bonds are a good investment.
The value of a sovereign gold bond is measured in kilos of gold. You can buy in 1 gram increments (gm). As a result, a 1 gram investment is required. The maximum amount of gold that can be purchased through gold bonds is 4 kg per investor every fiscal year. It is possible to nominate someone. Remember to amend the nominee information throughout the investing process, or you can do it later.
You might be shocked to learn that a set interest rate is one of the key advantages of the sovereign gold bond plan. Every year, the interest rate on gold bonds is 2.50 percent. Remember, this is in addition to the gold price increase. On the nominal value, interest is paid every six months or semi-annually.
Gold bonds have an average term of 8 years. After 5 years, the option to exit is available. If you wish to get out before the end of the term, you’ll have to do an early redemption. The bank must be notified. IDFC FIRST Bank, for example, has a 30-day notification requirement.
Additionally, gold bond holders can sell their bonds on stock exchanges at any moment. Please keep in mind that if the bonds are sold via the exchange platform, the applicable capital gains tax will be paid at the same rate as if the bonds were sold in person.
When you apply for a sovereign gold bond, you will be given an application number right away. In addition, all gold bond investors receive certificates from the RBI. The bank is responsible for delivering the certificate. Keep in mind that certifications typically take 15 to 30 days to be issued once an application is submitted.
For a variety of reasons, a sovereign gold bond is a superior investment than real gold.
For starters, when you apply for gold bonds online, you can get a lesser price than if you bought physical gold.
Fourth, because these bonds are issued by the government, they are backed by the government.
Fifth, individual investors benefit from the sovereign gold bond scheme since there is no capital gains tax at maturity or redemption. For non-individual investors, there is also an indexation benefit if the money is transferred before maturity. Keep in mind that the interest you earn is taxable. There is no TDS during redemption or interest distribution, which is a welcome relief.
Last but not least, a sovereign gold bond is extremely liquid. This is due to the fact that the investment can be used as a form of collateral for loans.
Gold bonds are available for purchase by all residents, HUFs, registered entities such as trusts, universities, charity institutions, societies and clubs, partnership firms, and private or public limited enterprises.
Non-Resident Indians (NRIs) and foreign institutions/entities, on the other hand, will not be permitted to own gold bonds.
Gold bonds should be purchased by all gold investors. This is a fantastic credit-risk-free investment option. There are no set-up costs or annual fees to pay. It’s also taxed like actual gold and comes with indexation benefits.