Can gold give you interest income plus capital appreciation?

6 MinsAug 6, 2021

Traditionally, Indians have purchased gold either in the form of jewellery, coins or bars to mark an auspicious occasion or during festivals. It is also increasingly becoming a popular gifting option. While yellow metal in any form has a certain value, it is easier to hold and store if purchased in a paper form. One way to purchase paper gold is by investing in Sovereign Gold Bonds. (SGBs). They are safer and more secure than physical gold. Besides, their lock-in period makes them suitable as a medium to long-term investment option. Let us see how to invest in SGBs.

sovereign gold bonds


What are SGBs?

Simply put, SGBs is a bond, backed by the government and issued by the Reserve Bank of India. It is denominated in units of gold. The minimum investment required is equivalent to 1 gm gold and its multiples thereafter.

Lock-in period

SGBs have a maturity of 8 years. They also have a lock-in period of 5 years, after which you can redeem the bond. At the time of redemption or maturity, you will get the prevailing price of gold.

Capital appreciation plus interest income

SGBs offer a fixed interest rate of 2.5% per annum on the investment, which is credited to your account semi-annually. In addition, you may also get capital appreciation at the time of redeeming or maturity, depending on how the gold price has moved during that period. The annual interest income is a benefit that you would not get if you invest in gold coins or jewellery and keep them in a safe deposit locker.

Taxation

If you hold your SGBs till maturity, it is exempt from long-term capital gains tax. If you redeem it after the fifth year, the gains, if any, will be subject to LTCG at 20% with indexation benefit (calculated after adjusting for inflation). Therefore it makes sense to hold your SGBs till maturity if you do not need the money.

How to invest

  • The RBI issues SGBs in regular tranches, for which the dates and the prices are announced on the RBI website. If you invest online and pay digitally, you get a discount on the gold price, on a per gram basis.
  • The price of each tranche will depend on the prevailing market rate of gold. This is something you need to monitor, at the time of investing. If you have a demat account you can hold the SGB in a demat form and also trade it on stock exchanges.
  • There are designated banks that sell SGBs. Axis Bank is one of them and you can buy the SGB through Axis Bank. If you are an existing customer, you can invest online and instantly, without any paperwork. If you are a non-Axis Bank customer, you can buy SGBs at an Axis Bank branch.

Benefits of investing in SGB

  • Earn annual interest on your initial investment, plus capital appreciation if gold prices rise. Given the five-year lock-in period and eight-year maturity period, there are high chances that gold prices could appreciate, leading to an increase in returns. As against this, you don’t earn any interest on your physical gold. The only gains are at the time of selling it, depending on the prevailing market price of gold.
  • In the case of SGBs, there is no capital gains tax if you hold it till maturity, i.e. for 8 years. If you redeem it after the fifth year, you pay 20% LTCG tax after indexation, which reduces the overall tax impact. As against this, in the case of physical gold you have to pay short-term capital gains tax at your income tax slab if you sell within three years, and LTCG tax of 20% with indexation, if you sell after three years.
  • Since SGBs are held in paper or demat form, you don’t have to worry about their safety. You can save on locker charges which you may incur if you want to store your physical gold securely.
  • You don’t have to worry about the purity of the gold since SGBs are government-backed. Also, at the time of selling the bond, there is no deduction of making charges, which is the case with physical gold.

Why should you invest in gold?

Gold is a hedge against inflation and a portfolio diversifier. Typically gold prices appreciate during times of economic stress. Hence, you can invest about 5-10 % of your total portfolio in gold, for a medium to long-term period.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author 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.