All You Need to Know About Sovereign Gold Bonds
22 Dec 2022
Table of Content
That Indians love investing in gold, is no hidden secret. We buy gold on big and small occasions. Gold is considered an excellent investment in India, irrespective of the form in which it is purchased. However, when you buy gold jewellery, you end up paying a lot more in making charges. How, then, can you get the benefits of gold loan in the long term? Well, you can invest in sovereign gold bonds. Let’s find out what is a sovereign gold bond and other essential facts about it.
What is sovereign gold bond?
Introduced in 2015 by the Government of India, sovereign gold bonds were launched under the Gold Monetisation Scheme. The Government issues gold bonds every year (since 2015). Gold is issued in tranches by the RBI, in consultation with the Government.
Under the scheme, bonds are denominated in multiples of grams with the minimum unit being 1 gram gold. The Government offers interest of 2.50% per annum on gold bonds, which is paid semi-annually.
Basic Features and benefits of sovereign gold bond schemes
Now that we know what is gold bond scheme let’s look at the basic features and advantages of the scheme.
- You can hold your gold bonds in paper form or demat form, whichever you find convenient.
- You can buy gold bonds in multiple weight denominations with 1 gram being the minimum weight.
- Investing in the gold bond is rather flexible as you have the option to choose the amount you wish to invest
- You can earn interest on your gold bonds semi-annually
- You do not have to worry about storing the gold since it is issued in certificates or demat form and not in the physical form.
- The sovereign gold bond scheme is backed by the Government, making it one of the safest schemes, in that the investor does not have to worry about the purity of the gold.
- While the scheme matures after eight years, you can prematurely withdraw from it after five years
How Sovereign Gold Bonds Work?
Sovereign Gold Bonds (SGBs) are a type of government security and a great substitute for physical gold investments. These are issued by RBI on behalf of the Government of India and it tracks the price of actual gold. SGBs are issued in the denomination of one gram of gold i.e., each bond will represent the price of one gram of gold. As the price of gold increases or decreases, so does the value of the bond. Further, investors are paid an interest of 2.50% per annum which makes it a more attractive opportunity than physical gold. The bonds come with a lock-in period of 8 years. However, investors are provided with an option to exit after a period of 5 years. The gains on SGBs are tax-free. However, the interest portion is taxable at the tax rate applicable to the investor
Risks Involved in Buying SGBs
As Sovereign Gold Bonds (SGBs) are government securities, it does not pose a default risk for the investors. However, SGBs track the price of gold. Therefore, there is a risk of capital loss in case the gold prices fall. This is not an SGB-specific risk but an asset-class risk that is equally applicable to SGBs. Further, the lock-in period reduces the liquidity of the investor as one cannot redeem the SGBs for at least 5 years after investment. Therefore, it should be considered for investment if the investor has a time horizon of at least 5-8 years.
Essential facts about the sovereign gold bond scheme
Having explained what sovereign gold bond scheme is, here’s a look at some crucial facts about this scheme.
- Sovereign gold bonds are provided for tenures of up to 8 years. However, one may exit the bond only after the 5th year. You may exit the scheme only on the interest payment dates on the 5th, 6th and 7th year.
- You may subscribe for a maximum limit of up to 4 kilograms gold if you are an individual subscriber or a member of a Hindu Undivided Family in a fiscal year (Apr-Mar). Trusts and charitable entities can subscribe for up to 20 kilograms of gold.
- Under the Government Securities Act of 2006, Gold bonds are issued as stocks and investors are provided with a holding certificate for the shares issued.
Things to Know Before Investing in SGBs
Before investing in SGBs, one should consider the exit options and lock-in period. Redemption is allowed only after 5 years. Further, taxation becomes an important aspect as while capital gains are exempted from tax, interest is still taxable. SGBs also serves as collateral assets that can be used to avail of financing facility. This can help you get gold loans at affordable interest rates.
Knowing what sovereign gold bond is essential before investing. Speak to your investment advisor before you invest in the scheme.
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