Are Sovereign Gold Bonds worth the investment?

6 MinsJune 6, 2022

Indian’s love of gold is known to all. It holds an emotional value for us and is traditionally passed down generations. Besides, gold symbolises wealth and holds a religious significance: a mark of Goddess Lakshmi. For this reason, India is the second-largest consumer of gold, right after China. 

Are Sovereign Gold Bonds worth the investment

Today, other than buying physical gold (viz. jewellery, bars, and coins), you also have smarter options to invest in gold. One such option is the Sovereign Gold Bonds (SGBs).

What are SGBs?

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 1 gram of gold and multiples thereof.

The maturity period for SGBs is eight years (with an exit option at the end of the fifth year to be exercised on the interest payment date). They are tradable on the stock exchange. Until five years, investments in SGB are subject to lock-in.

Who can invest in SGBs?

  • Any person resident in India (as defined under Foreign Exchange Management Act, 1999) can invest in SGBs. This includes individuals, HUFs, trusts, universities, and charitable institutions. All applications in SGBs will be subject to compliance with KYC norms. 
  • In the case of individuals, joint holding is allowed. A minor may also invest through his/her guardian.
  • If there is a change in residential status from resident to non-resident, then you may continue to hold SGBs until early redemption (at the end of the fifth year) or till maturity (for eight years).

How can you invest in SGBs?

  • You can invest in SGBs as and when they open for subscription. The application to invest in SGB needs to be made in ‘Form A’ (or any other form as near as thereto), wherein you need to state how much gold you wish to invest in, your full name, the residential address, email id, Permanent Account Number (PAN) as issued by the Income-tax Department, nomination details, bank details, along with the necessary valid identification document and the application money. 
  • It is possible to apply and purchase SGBs, both offline and online. For online purchases, the issue price is lower by Rs 50 per gram than offline purchases.
  • The application form for investment in SGBs is available with the issuing banks ––Axis Bank is one of them ––and with designated Post Offices/agents. Alternatively, you may download the application form from the RBI’s website. 
  • You will receive the allotment once you submit the filled and signed application form, valid document and the application money. 
  • On allotment, a ‘certificate of holding’ is issued with a certificate number, stating the amount invested, the number of units allotted, issue date, maturity date, unique investor id (generated by e-Kuber, the Core Banking Solution platform of RBI), bank IFSC, and nominee details. As an investor, you also have the option to convert your holdings into a dematerialised (demat) form.
  • The minimum investment allowed is 1 gram. The maximum limit is 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (i.e. April – March). Note, in the case of joint holdings, the limits shall apply to the first applicant.

What are the benefits of investing in SGBs?

  • During the holding period, one earns interest @2.50% p.a. (fixed rate) on the initial amount in SGBs. The interest will be credited semi-annually to your bank account, and the last interest will be payable on maturity along with the principal. Tax Deduction at Source (TDS) does not apply to the interest earned. 
  • At maturity (at the end of eight years), your SGBs shall be redeemed. The redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association (IBJA). 
  • At the end of maturity, you may gain from likely capital appreciation on gold (since SGBs are linked to the price of gold). Typically, in times of macroeconomic risk, geopolitical tensions, pandemics, rising inflation, and slowing growth, gold would appreciate and prove its trait of being a haven and store of value. 
  • At the time of redemption, the proceeds will be credited to the bank account used for purchasing these bonds.
  • Since SGBs are tradeable on the exchange, it is also possible to prematurely encash them at the end of the lock-in period, i.e. after the fifth year from the date of issue. Or you could also approach your bank at least one day before the coupon payment date, for premature redemption. The proceeds from the redemption will be credited to your bank account.
  • Moreover, if you wish to gift SGBs to your relative or near and dear ones, it is possible, provided the person whom you intend to gift, fulfils the eligibility criteria. 

What are the tax implications of investing in SGBs?
The interest earned on SGBs is taxable (under ‘Income from Other Sources’) as per the provisions of the Income-tax Act, 1961 (43 of 1961) and will be taxed as per your income-tax slab. 

[Also ReadInvest in Sovereign Gold Bonds and Smartly Diversify Your Portfolio]

SGBs that are sold at maturity (i.e. at the end of the tenor of 8 years) are exempt from capital gain tax. However, if SGBs are sold before maturity, that is, at the end of the lock-in period of 5 years, Long Term Capital Gain (LTCG) tax @ 20% (with indexation benefit) will be levied, plus the applicable surcharge and 4% cess.

Should you invest in SGBs?
SGBs are a worthwhile investment. It earns not only interest but also potential capital appreciation. In other words, SGBs allow you to sort of hedge your investment portfolio the smart way.

Investing in SGBs is a better alternative than physical gold, as the risks and costs associated with holding physical gold are eliminated. SGBs are held in the books of the RBI or a demat form eliminating the risk of loss, theft, etc. You also steer clear from issues such as making charges and purity of gold which often is questioned when you sell physical gold jewellery.

With SGBs, the redemption price is based on the simple average of the closing price of gold of 999 purity the previous 3 business days from the date of repayment, as published by the IBJA.

Strategically allocating a small portion (around 10-15%) to gold and investing in SGB makes sense from a diversification standpoint. 

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.