SGB is open to all Indian residents, including individuals, trusts, HUFs, charitable institutions, and universities. You can also put money into a minor’s account.
Denomination/Value
The bonds are valued in gram(s) of gold multiples, with 1 gram serving as the base unit. The minimal initial investment is one gram of gold, with a maximum investment of four kilograms of gold per investor (individual and HUF). 20 kg of gold are authorized for trusts and universities.
Interest Rate
On your original investment, the current interest rate for SGB is 2.50 percent per year. It is paid on a bi-annual basis (semi-annually). The current market price of gold is frequently used to calculate returns.
Issuance of Bonds
SGBs are issued by the Reserve Bank of India on behalf of the Central Government and are traded on the Stock Exchange. It’s only available in one-gram increments. It will be accompanied by a Holding Certificate for investors. It’s also possible to convert it to Demat form.
KYC Documentation
When buying real gold, you must follow the same Know-Your-Customer (KYC) guidelines. For verification, you must submit copies of your identification proof, such as your PAN card, and your address proof, such as your passport, driver’s license, or voter’s ID card.
Tax Treatment
According to the requirements of the 1961 Income Tax Act, the interest on Sovereign Gold Bonds is taxable. Individuals are free from paying capital gains tax when they redeem their SGBs. Long-term capital gains are also granted indexation benefits to investors or when the bond is transferred from one person to another.
Eligibility for SLR
If banks bought bonds after invoking lien, hypothecation, or pledging, they had to account for SLR. The Statutory Liquidity Ratio is the amount of capital a commercial bank must keep in gold, cash, and approved securities before it can extend credit to consumers.
Sales Channel
As may be stated, the government sells bonds through banks, the Stock Holding Corporation of India Limited (SHCIL), and some post offices. SGBs can also be traded directly or through intermediaries on recognized stock exchanges (such as the National Stock Exchange of India or the Bombay Stock Exchange).
Commission
For the distribution of the bond, the receiving offices will charge a commission of 1% of the total subscription amount. They will share at least half of the commission with intermediaries (agents or brokers).
Eligibility
A Sovereign Gold Bond Scheme is available to all Indian residents. SGBs can be purchased by HUFs, trusts, universities, and charitable organizations. Guardians can also invest on behalf of minors.
Investment
Gold bonds are valued in multiples of gold grams. One gram equals one unit. The smallest investment is one gram of gold, with a maximum investment of four kilograms per investor and Hindu Undivided Family. The maximum amount of gold that can be held by an entity is 20 kg.
Tenure and Premature withdrawals
SGBs have an eight-year term. A five-year lock-in term is required for India’s sovereign gold bonds. After the fifth year, the investor can redeem the bond. Withdrawals are only permitted on interest payment dates.
Interest Rates
In the current financial year, the interest rate on gold bonds is 2.5 percent. On the nominal value of the investment, interest is paid twice a year. The returns are based on the current gold market price.
Taxation
According to the Income Tax Act of 1961, the interest on these bonds is taxable. There is no capital gains tax on this when it is redeemed. Long-term capital gains also provide indexation benefits.
In the last three days, the average closing price of gold of 999 purity was used to calculate the redemption price of SGBs.
Bond Issuance
RBI offers gold bonds on behalf of the Indian government under the GS Act of 2006. For their gold bond investment, investors will receive a holding certificate. It is also possible to convert it to a Demat Form.
Eligibility for Statutory Liquidity Ratio (SLR)
If banks bought bonds after hypothecating, securing a lien, or pledging them, the Statutory Liquidity Ratio was taken into consideration (SLR). SLR is the amount of capital held by a commercial bank before it extends credit to consumers.
Authorized Agencies
The Indian government sells bonds in a variety of ways. Stock Holding Corporation of India (SHCIL), banks, selected post offices, and authorized stock exchanges, either directly or through their agents, are some of the avenues available. SGBs can be traded through intermediaries or stock exchanges like the National Stock Exchange or the Bombay Stock Exchange.
For the distribution of the bond, the receiving office charges a 1% commission on the total subscription amount. The intermediaries brokers or agents receive at least half of the commission.
When a sovereign gold bond matures, how do you redeem it?
Based on the simple average of closing gold prices for the week of November 08-12, 2021, the redemption price for the premature redemption due on November 17, 2021 will be Rs 4860 per unit of SGB.
Government securities denominated in gold grams are known as sovereign gold bonds. They aren’t meant to be used in place of genuine gold. The issuance price must be paid in cash, and the bonds must be redeemed in cash at maturity. The bond is issued by the Reserve Bank of India on behalf of the Indian government.
Is it possible to sell a sovereign gold bond before it matures?
Is it possible to redeem early? Despite the bond’s 8-year tenor, early encashment/redemption is permitted on coupon payment days after the fifth year from the date of issue. If kept in demat form, the bond will be tradable on exchanges.
Is redemption of SGB after 8 years required?
Capital gains on Sovereign Gold Bonds are taxed in the same way that they are on actual gold.
If you sell Sovereign Gold bonds in the secondary market before the three-year holding period is up, the proceeds are considered short-term capital gains and are taxed at your marginal rate.
If you sell Sovereign Gold bonds in the secondary market after three years (holding period), the proceeds will be considered long-term capital gains and will be taxed at 20% after indexation.
On redemption, there is no capital gains tax (or maturity). This relief is only available to individual investors (Section 47 of Income Tax Act).
As a result, you can purchase SBG at Rs 4,500 per gram and redeem it with RBI at Rs 6,500 per gram after 8 years. There will be no capital gains tax to pay. Remember that you can redeem SGB at 6-month intervals after 5 years. There would be no tax levied on such redemptions as well.
This is to align SGB taxes with that of actual gold. In fact, it benefits SGBs considerably more. When it comes to real gold, you can keep it for as long as you like and avoid paying capital gains tax. Sovereign gold bonds, on the other hand, have an 8-year maturity. Capital gains taxes on redemption would have been a deterrent. As a result, this clause has been introduced.
When the SGB matures (or you redeem it), you can use the funds to buy another gold bond, physical gold, or jewelry, or to make any other purchase.
What are the pros and cons of investing in Sovereign Gold Bonds?
Let’s take a look at different ways to invest in gold and the challenges that come with it before we get into the benefits and drawbacks. And how SGBs fare in the face of them.
- (Expense ratio.) Gold Mutual Funds Gold mutual funds have a wide range of performance.)
- ETFs that invest in gold (Expense ratio, low liquidity, impact cost, Price and NAV difference)
None of the gold types listed above pay you interest. Sovereign Gold Bonds are the only ones that qualify.
You do not have to pay any fees, unlike gold mutual funds and gold ETFs. For some funds and ETFs, the expense ratio was close to 1%, according to my research.
Sovereign gold bonds provide an extra advantage. According to my understanding, all of the following kinds of gold will be subject to a 3% GST when purchased. Even gold mutual funds and exchange-traded funds (ETFs) must purchase the underlying gold. There is no GST impact with Sovereign Gold Bonds because there is no underlying gold (we assume the government will match the gold price).
The issue with sovereign gold bonds is that they are not without flaws. If you have to sell on the secondary market, you may run into problems.
In the secondary market, liquidity is a concern. This could result in a greater impact cost (difference between bid and ask spread). In the worst-case scenario, you might not be able to sell at all, or you might have to sell at a significant discount.
Lower liquidity in the secondary market is due to a variety of factors. To begin with, there are a large number of SGB issues traded on the market. As a result, the demand is dispersed across a large number of investments. Second, SGBs are virtually always issued by the RBI on a monthly basis. As a result, rather than buying on the exchange, potential buyers can subscribe directly to the new issue (unless they can buy something on the exchange at high discount).
There was previously a problem with inter-depository transfers (between CDSL and NSDL). Thus, most brokerage firms didn’t allow you to buy in the secondary market (though they are authorized to sell) (though they are allowed to sell). This, as far as I can tell, is no longer an issue.
Whatever the reason, most problems have low liquidity. Some concerns aren’t even trade-related. On the NSE website, you may get information regarding trading volumes. This information may not be as beneficial to you as a vendor. Only what you own can be sold. As a potential buyer, you must, however, consider this factor. Simultaneously, keep an eye on current gold price levels before placing a buy bid. Also, keep in mind that the SGBs have a component of interest. The difference isn’t just in the interest rate (the previous rate was 2.75 percent p.a.). The amount of interest you earn is determined by the cost of your membership. Factor in these aspects while submitting your bid. In the following post, I go over these topics in depth:
You must keep these factors in mind if you plan to buy or sell Sovereign gold bonds on stock exchanges.
After 5 years, how do I sell my gold bond?
- Indexation Benefit: If an investor transfers bonds before maturity, the investor will receive indexation advantages and the interest earned and redemption money will be guaranteed by the government.
- Benefits of Trading: An investor can trade gold bonds on numerous stock exchanges within a specific time frame. After 5 years, gold bonds can be traded on the National Stock Exchange and the Bombay Stock Exchange.
- Sovereign Gold Bonds can be used as collateral or security against a variety of secured loans, according to some banks.
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.
Can I keep SGB when it reaches maturity?
No, SGBs (Sovereign Gold Bonds) are government securities with a set maturity date. As a result, it will automatically redeem on the maturity date, and monies will be remitted to your bank account. Once you have funds in your bank account, you can invest in similar bonds to continue your investment.
How do I get out of SGB?
SGBs are issued for an eight-year period, however after five years, they can be redeemed for sovereign gold. On the date of the interest credit, the premature redemption window begins every six months.
At least one day before the payment date, investors must submit a redemption request to the bank/post office/agent from whom they purchased the bonds. SGB gains are tax-free when they mature.
There is, however, a lack of clarity about the taxes of premature redemption. According to some experts, if a bond is redeemed early, the gains will be taxed as long-term capital gains, requiring investors to pay a 20% tax after adjusting the purchase price for indexation.
A person who wishes to withdraw money early can do so 30 days before the coupon payment date by contacting the relevant bank, stock-holding corporation, post office, or agent.
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.
Is it a good time to buy gold bonds?
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. When you purchase and sell jewellery, there is a loss of 15-20 percent in making charges each time you alter the type of gold. 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 hassles of gold maintenance and translation loss are largely 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.