Sovereign Gold Bond (SGB) Scheme
The sovereign gold bond scheme is an investment program offered by the Reserve Bank of India. According to it, individuals can invest in gold in a safe and secure manner. Some of its most salient features include varied investment limits, fixed rate of interest, exemption from capital gains tax if redeemed at maturity, etc.
Sovereign Gold Bond Benefits
Investing in bonds comes with numerous benefits. Here are some of the most prominent ones:
- Hassle-free: One of the most significant advantages of investing in sovereign gold bonds is that it is easily accessible, and the process of investing is hassle-free. Since the process is accounted for and managed by the Reserve Bank of India, sovereign gold bond investments offer individuals an easy way to invest in gold without worrying about holding physical gold. Almost all major banks, including ICICI bank, HDFC bank, SBI bank, etc., offer individuals the option to invest in sovereign gold bonds online. Hence, the process is significantly simplified for the majority of people who wish to make a safe and reliable investment. Moreover, it facilitates investors to own gold without physically possessing it.
- Tax treatment: As mentioned earlier, the standard tenure of sovereign gold bonds is 8 years. Investors have the option to redeem their investments early, i.e., opt for redemption at the end of the 5th, 6th, or 7th year. However, individuals who wish to maximize their investment’s value can lock it in for the entire tenure. Doing so will exempt the capital gains tax, resulting in better profits.
- Tradability: A fortnight after sovereign gold bonds are issued, they become tradable on stock exchanges. The date is set and notified to the investors by RBI. This feature of sovereign gold bonds makes them a better investment option than pure gold.
- Transferability: Sovereign gold bonds are transferable investments. Investors can choose to gift or transfer them to anyone who meets and fulfills the eligibility criteria. Moreover, the process of transfer should follow the provisions of the Government Securities Act.
Sovereign Gold Bond Features
Here are some of the most prominent features of sovereign gold bonds:
- Eligibility: As per the sovereign gold bond scheme, the bonds are readily available for Indian entities, including individual investors, trusts, universities, charitable institutions, etc. Another category of investors may need to visit their respective bank branch and follow the standard procedure to apply for the tranche.
- Denomination: When it comes to the denomination of sovereign gold bonds, they are generally denominated in units and multiples of one gram of gold.
- Minimum Size: The minimum investment limit in terms of size when it comes to sovereign gold bonds is set at 1 gram of gold.
- Maximum Limit: The maximum limit of gold bonds that can be subscribed by different entities varies. For example, an individual can own a maximum of 4 kg. Similar entities such as a HUF or a Hindu Undivided Family are also allowed to hold a maximum of 4 kg. However, when it comes to trusts, the maximum limit is 5 times more as compared to other entities, i.e., trusts can hold a maximum of 20 kgs worth of gold bonds.
- Interest Rate: The investors are paid interest based on their initial investment amount in accordance with the rate notified by the RBI at its launch. The interest amount is payable semi-annually.
- Tenor: The tenor of sovereign gold bonds subscribed by investors is 8 years. Investors are also provided an exit option as soon as the 5th year begins.
- Redemption: The redemption price of sovereign gold bonds is fixed in INR. It is based on the simple average of the 999 purity gold’s closing price of the previous 3 days from the repayment date.
How Sovereign Gold Bond Works
How are SGBs taxed?
Gold bonds feature a maturity period of 8 years. Any investor who holds it till maturity is exempt from paying taxes, i.e., the capital gains earned will be tax-free. However, premature redemption or withdrawal is possible from the fifth year.
Anyone wishing to redeem their sovereign gold bonds before the maturity date must approach their respective bank, stock-holding company, or the concerned individual at least 30 days before the coupon payment dates. If any investor wishes to redeem their investment after the 5th year, the gains will be taxed at 20% post indexation.
Where can I buy SGBs?
Numerous banks offer individuals the option to invest in sovereign gold bonds. Most of them, including prominent names like ICICI bank, SBI, HDFC, etc., offer people the convenience of investing in sovereign gold bonds using the net banking option. The procedure of purchasing SGBs online is mostly similar in the case of all leading banks.
Who can invest in SGB?
As stated under the Foreign Exchange Management Act of 1999, individuals residing in India are eligible to invest in SGBs. Moreover, other similar entities eligible to invest in the sovereign gold bond scheme include HUFs, trusts, universities, and other financial and charitable institutions.
Any individual or eligible entity who wishes to invest in SGBs online can apply through the official websites of the listed scheduled commercial banks. Some of the most popular banks which offer users the option to purchase SGBs online are ICICI bank, State Bank of India, HDFC bank, etc. Besides this, SGBs are also issued by certain post offices, stock exchanges, etc.
The price of gold bonds will be Rs. 50 less than their nominal value. The payment for the purchase of said bonds will be made through digital mode.
Any individual or eligible entity who invests in SGBs is provided with an official holding certificate. The customers are given said certificate on the date the SGB gets issued to them.
There are two ways of obtaining the holding certificate. Investors can either collect their holding certificates from the issuing bank, post office, designated stock exchange company, etc., or obtain it directly from RBI by emailing. The email address where individuals need to send the email is stated in the application form.
As stated under the Foreign Exchange Management Act of 1999, residents of India are allowed to purchase and hold SGBs. Besides this, the list of eligible investors includes HUFs, trusts, universities, charitable companies and institutions, etc.
Indians who already own SGBs and are moving to another country are allowed to hold sovereign gold bonds until the period of early redemption arrives or until the arrival of the maturity date.
When it comes to investing in SGBs, investors face the risk of losing capital if the market price of gold declines. However, individuals holding SGBs do not lose in terms of gold units that they have paid for. Compared to other sorts of financial investments, SGBs offer lesser risk and better benefits.