Buying gold is an age old practice that people in India have been following to get good returns on their investments in the long run. Also, gold investments are considered safe as the prices of this particular commodity tend to increase with time due to several market conditions. However, in recent years, there has been a significant increase in number of people who prefer investing in gold bonds over the physical gold for several reasons.
Here, before we get into the sovereign gold bonds Vs physical gold debate, lets understand what gold bonds actually are.
What are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) are substitutes of physical gold issued as government securities by the Reserve Bank of India. Buying Sovereign Gold Bonds is better than buying physical gold majorly for the reasons listed below:
- No Storage Problems
- Free of making charges
- No requirement of purity certifications
- You get market value at maturity with periodical interest
Who can buy SGB?
Indian residents including Hindu Undivided Families (HUFs), individuals, universities, charities, trusts can invest in Sovereign Gold Bonds. Owning a Sovereign Gold Bond jointly is allowed too. This makes buying SGBs jointly a more attractive option than jointly buying physical gold since physical gold doesn’t have well-defined ownership documents.
Where can you buy SGB?
Moreover, Sovereign Gold Bonds are as easily accessible and purchasable as physical gold since their application form is available with issuing banks/scheduled commercial banks (excluding RRBs)/ Stock Holding Corporation of India Limited (SHCIL) offices/designated Post offices/National Stock Exchange of India Ltd. & Bombay Stock Exchange Ltd either directly or through their agents. The said form is also available on RBI’s website and you may also find the said form on the issuing bank’s website. The bond can also be gifted or transferred to a person who fulfils the eligibility criteria as described above. You can make SGB payment through cash -up to Rupees 20000/cheques/demand draft/electronic fund transfer.
What is SGB’s Denomination and its Ceiling Limit?
Sovereign Gold Bonds are dealt in the units of ‘grams of gold’. The minimum denomination of a Sovereign Gold Bond is 1 gram gold and multiples thereof. Thus, the minimum purchasable denomination of a SGB is 1 gram gold and the maximum purchasable denomination of a SGB is 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar organizations in a single April to March financial year. If the SGB is bought jointly then the aforementioned described limit will apply to the applicant who applied first.
What is Interest Rate on SGB?
Physical gold doesn’t earn you interest unless you mortgage it, however, Sovereign Gold Bonds will pay you interest money. The bonds will earn you fixed-rate interest at the rate of 2.50% p.a. on the initial investment amount. You will get semi-annual interest in your account. The last interest will be paid to you on maturity along with the principal.
How to Redeem SGB?
The investor is told of the upcoming maturity of the bond one month prior and then the Sovereign Gold Bonds can be redeemed on maturity. You will get the redemption amount in INR. The redemption price will be based on simple average of closing price of gold of ‘999 purity’ of previous 3 business days from the date of repayment as published by the India Bullion and Jewelers Association Limited. You will get the interest and the redemption amount in your bank account (which was provided by you at the time you bought the bond). If the investor’s bank account or contact details have changed in the meantime, then the investor should inform the bank/SHCIL/Post Office before-hand.
How is SGB allotment and Holding Certificate issued?
If an investor has requested for a gold bond and he/she meets the eligibility criteria then he/she will receive the request allotment subject to submitting the application money on-time. The Holding Certificate will be issued to the investor on the day they receive the Sovereign Gold Bond. You can receive SGB on email from the RBI too.
Can we apply online for the SGB?
Yes you can apply for the SGB online. Moreover, you will get a discount of Rupees 50 per gram on the nominal issue price if you apply for the SGB online and you pay for the bond digitally.
How is SGB value determined?
The SGB’s nominal value is based on the simple average of closing price of gold of 999 purity, as published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week which precedes the subscription period.
Can we premature redeem SGBs?
A Sovereign Gold Bond’s tenor is 8 years. However prior encashment/redemption is possible after fifth year from the date of issue of coupon payment dates.
What are the tax and risk implications on SGB?
The interest on the Sovereign Gold Bonds is taxable as per the IT Act, 1961 (43 of 1961). The tax arising on the capital gains on redemption of SGB to an individual is exempted. The indexation benefits to a person will not be given to short term capital gains but to long term capital gains. It is the sole responsibility of the bond holder to comply with the tax laws TDS applicable on the bond is concerned.
You can also use the SGBs as securities, i.e. SGBs can be used as collateral for loans from lending institutions. Also, Sovereign Gold Bolds are not risk-averse. If the capital price of gold declines in the market, Sovereign Gold Bond prices are also going to decline. However, this market trend will also equally affect physical gold. Moreover, the buyer is safe in terms of the units of gold which he has paid for.
Conclusively, buying Sovereign Gold Bonds is better than buying physical gold as you don’t have to worry to store it, you will get discounts when buying it online, you will get tax subsidies on capital gains, you will get periodic interest and many other benefits making it a profitable choice.
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This is really helpful, thanks.