Sovereign gold bond scheme: Best investment option in Gold

By Rohit Malik

August 5, 2019


Sovereign Gold Bond Scheme

Sovereign Gold Bond Scheme
~Image courtsey DDNEWS

As per RBI, SGBs is defined as –

“SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.”

The highlight of the scheme is that you get:

Gold’s market returns + Fixed 2.5% per year on invested amount. Guaranteed by Government of India*

These are bonds. A very different and better investment vehicle as compared to Gold ETFs.

These bonds are better investments as compared to E-Gold.

Benefits of Sovereign Gold Bond Scheme (SGBs)

  • These bonds are guaranteed by Government of India. That alone is the highest graded security you can get.
  • You get interest on top of market growth of Gold prices. This gives these bonds an added return of 2.5% on top of any other form of Gold investment.
  • They are directly credited to your demat account by RBI. This leaves out room for any kind of broker intermediation and charges related to that.
  • Income, the interest & profit earned, from these bonds is exempted from capital gains tax. This is the biggest benefit of investing in SGBs. In case you transfer the bond to anyone, you still get the benefit of indexation of long term capital gain.
  • Within fortnight of issuance of bonds by RBI, they are tradable on stock exchanges. Which means they are highly liquid.

These benefits make these bonds, the best investment in Gold currently available in India.

Now, let’s have a look at how to buy these bonds.

How to buy SGBs

SGBs are not available like other investments. You can’t simply buy them in the stock market. They are released in tranches, by RBI on scheduled dates.

You can check out these dates here.

The dates for year 2019 are:

TrancheDate of SubscriptionDate of Issuance
Series IIIAugust 05 to August 09, 2019August 14, 2019
Series IVSeptember 09 to September 13, 2019September 17, 2019

To apply and invest in SGBs, you need a demat account.

Now, you need to wait for the date when RBI opens the subscription dates for Sovereign Gold Bonds. In these dates, you can apply for investment through your broker.

Once you have applied and the amount is deducted, you get these bonds allotted to you by RBI and they are credited to your demat account.

That’s it. There is nothing further, no other step. Now, while prices of Gold up, or stay stable, you are earning your interest free interest income.

Features of Sovereign Gold Bond

Denominations: The bonds are denominated in units of one gram of gold and multiples thereof. Thus, 1 gm is the minimum size of the investment in the bond.

Maximum limit: Maximum limit of subscription shall be of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities. These limits are notified by the government from time to time.

Interest Rate: The bonds are currently (Aug 2019) is being at rate of interest of 2.5%. But, the applicable rate of interest for Bonds are announced when the subscription is open. For the time you hold the bonds, you are paid the interest semi-annually, to your bank account.

Price of Gold: As per the RBI – Price of the Bonds shall be fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jeweler’s Association Limited for the last three business days of the week preceding the subscription period.

Tenor: The tenor of the bond will be for a period of 8 years with an exit option from 5th year onwards to be exercised on the interest payment dates.

Besides:

When you invest online, you get the issue price of Gold Bond at Rs. 50/- less than the nominal value(with certain limitations, check with intermediary portal)

Tax Implications of Gold Bond:

There are two components of return from the Gold Bond.

  1. Interest amount
  2. Capital Gain

Both these returns are computed different for taxation purposes.

Interest amount you earn on these Gold Bonds are taxable as per Income Tax Act, 1961. Which means they are added to your that year’s income and taxed accordingly. 

Whereas, capital gains you make out of holding these bonds till expiry are exempt from capital gain tax. 

How much can you invest in SGBs?

The Bonds are issued in denominations of one gram of gold and in multiples thereof.

Minimum investment in the bond is thus one gram.

Maximum buying limit maximum limit of subscription is 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities per fiscal year.

These limitations are applicable as:

  1. annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market; and
  2. the ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions.

About the author

Rohit Malik

A yogi who like Finance and Technology. I have been in Indian Stock market for over 12 years now as financial analyst, portfolio manager, trader. Now, I focus on Yoga, Financial Education & Long term investing. 

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