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Sovereign Gold Bonds: Meaning, Benefits, and More

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by Ankita Lodh on 16 July 2024,  4 minutes min read

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Gold has always been a popular choice for investing in India. But when it comes to gold, investing has transformed. While physical gold has been an investment method, since 2015, the Indian government has introduced the sovereign gold bond scheme as an alternative investment avenue.

Investor interest in SGBs has increased significantly, and they are now thought to be a viable alternative to actual gold. This type of market instrument is meant to be used over the long term and can be a viable option to diversify your portfolio.

What are Sovereign Gold Bonds (SGBs)?

Government securities issued in tranches and valued in grammes of gold are called sovereign gold bond schemes. On behalf of the Indian government, the Reserve Bank of India (RBI) issues sovereign gold bonds (SGB).

These bonds serve as alternatives to having actual gold in your possession. Cash is required from investors to cover the issuance price, and when the bonds mature, they can also be redeemed in cash. The corpus (based on the bond’s current market value) will be transferred into your designated bank account when you redeem the bond. 

Government securities, or SGBs, are regarded as relatively secure investments. Their worth is expressed in terms of multiples of gold grammes. All you need to do to buy an SGB is get in touch with an agent or broker like Dhanush who has been licenced by SEBI. 

That said, below is a graphical representation of the value of SGBs issued in India from FY16 to FY24 (in ₹ billion).

Source: Statista

Eligibility criteria

In India, residents, including Hindu Undivided Families, charitable institutions, trusts, and universities, can buy SGBs. The maximum amount can be 4 kilogrammes for individuals and HUGs, and for others, it is 20 kilogrammes. 

Investors can hold the bonds for a maximum period of 8 years from the date they are issued. While for the Sovereign Gold Bond Scheme 2023-24 Series IV, the dates are Feb 12–16, 2024, the sovereign gold bonds’ upcoming issues in 2024-25 are yet to be announced. 

Benefits of investing in Sovereign Gold Bonds

  • Regular interest 

The interest payment is one of the main advantages of the SGB scheme. For your SGB investment, the government offers a set yearly interest rate. The investor receives this interest payment, which is split into two portions, once every six months.

Regardless of changes in the price of gold, investing in SGBs guarantees you will get interest at a rate of 2.5%. This factor plays a crucial role in SGB’s popularity among investors and its demand in India. 

  • Easy access

SGBs are available in both paper and electronic formats, catering to all types of investors and their preferences. Upon investing in SGB, you will receive a holding certificate instead of actual physical gold.

This implies that you won’t need to worry about your gold being secure or about having to pay a yearly charge to keep it in a bank locker. There is no chance that the certificate will be stolen because it will be in your name. Because of this factor, SGBs are regarded as one of the most secure investments today. 

  • Tax exemption

Sovereign Gold Bonds also come with tax benefits, where no TDS is applied to the interest you receive upon buying the bonds. You can also take advantage of indexation by transferring the bond prior to its maturity.

The bond is even free from capital gains tax if you redeem it after it matures. But the interest is completely taxed under your income tax bracket. 

Apart from the above-mentioned points, this investment avenue is also highly secure due to government backing and is considered to be a stable investment compared to equity. 

Should you invest in Sovereign Gold Bonds?

If you are considering diversifying your investment, think about including a maximum of 10% of gold in your portfolio. Because they carry moderate to low risk, SGBs are a great option for investors with a low-risk tolerance.

When compared to the cost of actual gold, the cost of purchasing or selling SGB is also negligible, so it can be a viable investment for those who are willing to take less risk. SGBs are an option for people who don’t want to deal with the difficulties of keeping actual gold.

Bottom line

Sovereign Gold Bonds offer a unique opportunity for investors to diversify their portfolios in a low-risk manner. With benefits like guaranteed returns, tax advantages, and the backing of the government, these bonds present an attractive alternative to traditional gold investments.

They do have a unique set of considerations, though, just like any investment. The lack of liquidity before maturity and the potential for gold prices to fluctuate are factors that investors must weigh carefully.

FAQs

Is a sovereign gold bond a good investment?

Yes, sovereign gold bonds are a good investment for investors, usually with a 5-8-year investment horizon. Investors get the benefit of tax exemptions on capital gains, which is a major driving factor behind its popularity. 

What happens after 8 years of sovereign gold bonds?

After 8 years, investors can redeem the bonds at the prevailing gold price. Upon the maturity of the bonds, semi-annual interest credits will be made to the investor’s bank account, and at maturity, the whole amount owed in interest and principal will be repaid. 

Is SGB better than FD?

Both of the investments have unique benefits and challenges to consider. SGBs often outperform FDs for long-term investors due to potential gold price appreciation and tax benefits. 

Which is better, PPF or SGB?

This depends on individual financial goals as both investments are secure and government-backed. PPF offers fixed returns and is ideal for retirement savings. SGBs can help to hedge against inflation by exposing to gold prices.

Who cannot buy a sovereign gold bond?

Non-resident Indians (NRIs) and foreign nationals cannot invest in sovereign gold bonds. Only resident Indian individuals and certain institutions are eligible to purchase SGBs for a limited amount. 

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