Sovereign Gold Bonds | Investment | RBI

What are Gold Bonds?

Gold Bonds are also known as Sovereign Gold Bonds, Sovereign Gold Bonds are government securities denominated in grams of gold. These gold bonds are now a days used as a substitute for holding physical gold. Those who subscribe to these bonds are known as Investors. These Investors are required to pay the issue price in cash also, the bonds will be redeemed in cash on maturity. And, no physical exchange of gold would actually be made.

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Who issues Sovereign Gold Bonds?

What are the Eligibility Criteria or the Feature of Sovereign Gold Bonds?

Eligibility Criteria –

a person has to be Indian resident Individual, HUF (Hindu Undivided Family) , Trust, Charitable Institution or University to be eligible to make a subscription to Gold Bonds. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold Sovereign Gold Bond till early redemption/maturity.

2. Denomination/value-

A bond’s value is measured in multiples of grams of gold, 1 gram being the basic unit. This means that the initial investment is one gram of gold. The upper limit is 4 kgs of gold per individual & HUF. However, universities and trusts can invest up to 20 kgs of gold.

3. Tenure-

The maturity period of a gold bond is 8 years. However, an investor can choose to exit the bond after the fourth year only on interest pay-out dates.

4. Price and Payment-

An investor has the option of paying online, via demand draft or cheque or up to Rs 20000 via cash. On making the digital payment or online subscription one can also avail a discount of Rs 50 for each gram.

5. Interest Rate-

The gold bonds attract an annual interest rate of 2.5%. They are paid on the nominal value twice a year. Returns are normally linked to the current market price of gold.

6. Issuance of bonds-

The government of India Stocks has the right to issue gold bonds on RBI’s behalf, according to the GS Act, 2006. https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/GOVTSA130312.pdf   

7. KYC Documentation-

Investors must follow the Know Your Customer (KYC) norms while buying physical gold. Hence, the KYC documents like copy of driving license, PAN Card, passport or Voter ID needs to be kep

8. Tax Treatment-

There is no tax on the proceeds of sovereign gold bond at the time of redemption. And, you can claim indexation benefits on the long term capital gain arising when you decide to transfer the bond. Which means, the tax implication of gold bonds are different from that of physical gold. However Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (Section 43)

9. Sales Channels-

The government sell bonds through banks, stock Holding Corporation of India Limited (SHCIL) and selected post offices as may be informed. The trading also occur via stock exchange like Bombay Stock Exchange (BSE) or National Stock Exchanges (NSE) of India directly or through intermediaries.

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What are the various Sovereign Gold Bond Schemes for the year 2018-19?

The Sovereign Gold Bonds will be issued every month from October 2018 to February 2019 as per the calendar specified below, the sovereign Gold Bonds Calendar as per RBI policy is

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Who should invest in Gold Bonds?

Since Gold Bonds are issued by RBI under the flagship of Government of India. People who are Risk averse (Risk averse means people who afraid to take risk / who avoid Risk are known Risk averse), prefer to invest in such bonds.

In addition to being safe and secure mode gold bonds are easy to store in paper form. Unlike, the physical gold which is usually kept in bank lockers or at a safe place.

In short, if someone is seeking a long-term investment avenue to make good returns, a gold bond can be best for their needs.

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What are the distinguished features of Gold Bonds?

There are many distinct features of gold bonds which make it an attractive investment option too. Like,

• It can also earns you a fixed interest income bi-annually.
• The expenses for selling and buying this SGB is nominal as compared to the physical gold.
• Government has also assured that investors would get the market value of gold at the time of maturity.
• These bonds are free from issues like high making charges and purity.
• The paper form of gold bonds makes it easy to store and provides safety from being stolen or lost.
• The bonds can be used as a collateral.

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How and who can buy SGB (Sovereign Gold bonds)?

The Reserve Bank of India on behalf of the government announces an issue of these gold bonds periodically. One can subscribe to the same online or offline. SGB will be issued on making the requisite payment by the

• Resident Individuals and
• Other resident entities like HUF, Trust, Universities, Charitable Institutions.

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What is the minimum or maximum quantity a person can buy through Gold Bonds?

The minimum quantity which a person can buy is 1 grams. Whereas,

• In case of individuals and HUF  the maximum limit is 4 Kgs and
• In case of others the limit is 20 Kgs.

These limits are to be calculated for all the bonds subscribed during one financial year. In case of joint holding, the limit applies to the first applicant.

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Where can I buy SGB (Sovereign Gold bonds)?

Anyone can apply for the bonds through

• Scheduled commercial banks like ICICI banks and
• Designated post offices
• Non-Banking Financial Company and

National Saving Certificate agent can act as advisors or agents. They would be authorised to collect the application form and submit in banks and post office. Bombay Stock Exchanges (BSE) and National Stock Exchange (NSE) are included as receiving offices, apart from the commercial banks.

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Why should I buy SGB rather than physical gold under the SGB scheme?

The reason why one should buy SGB rather than physical gold under the SGB scheme depends upon a number of factors like,

• The quantity of gold for which the investor pays is protected. As the investor receives the ongoing market price at the time of redemption of such bonds.
• Also, the SGB offers an alternative to holding gold in physical form.
• This bonds are free from issues like making charges and purity in the case of gold in jewellery form.
• The bond are issued from Reserve Bank of India on behalf of government.
• The bonds are also distributed through banks and designated post office.

What are the various advantages of Sovereign Gold Bonds?

Absolute safety

Sovereign gold bonds carry none of the risks that is associated with physical gold, except the market risks because it is in paper form so risk is less for stealing. There is no hefty designing charges or TDS. Therefore stealing factor is not comes into picture or changes its ownerships

Extra Income

In sovereign gold bonds annual interest at the rate of 2.50% (on the issue price). This is the most recent fixed rate as per Reserve bank of India policy.

Indexation benefits

If someone wants to transfer there bond before maturity, they can get indexation benefits. There is also a sovereign guarantee on the redemption money as well as on the interest earned, this is a major advantage of sovereign gold bonds.

Tradability

It allows you to trade the gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issue). For instance, the minimum period is 8 year but after completing 5 years of investment, you can trade them on the National Stock Exchange or Bombay Stock Exchange among others.

Collateral

Some of the banks accept SGB as security against secured loans like ICICI bank, Kotak and HDFC banks etc.

How SGB (Sovereign Gold Bonds) are different from Physical Gold purchases and Gold ETF (Exchange Traded Funds)?

SGB differ from physical gold and ETF in numerous ways, such as

Everything about taxes and gold bonds

Let us divide the discussion in two parts, namely

• SGB (Sovereign Gold Bonds)
• Gold ETF (Exchange Traded Funds)

Sovereign Gold Bonds have multi tax benefits.

with the announcement of Budget 2016-17 a greater relief was provided to SGB holders. It exempted redemption of bonds after the maturity period and the withdrawal has become completely tax free. Since the bonds are tax free no liability for TDS deduction arises over the same. However, if these are transferred before the date of Maturity, tax will be applicable.

As far as Gold Exchange Traded Funds are concerned it attracts following taxation provisions:-

• Long Term Capital Gain – This shall be charged at the rate of 20% on the securities sold after 3 years.
• Short term Capital gains – It arises on units sold before 3 years at the slab rate applicable to the investor.

Indexation benefit on Long term capital gains is available for both the options.

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Being safe and a higher return generating why SGB are still lacking behind?

There are various factors contributing to restricted investors base for SGB, such as

• Non Regular Supply – the gold bonds cannot be readily purchased anytime as per the discretion of the investor. the government issues the bonds periodically  in tranche.
• New Product – Purchasing Gold and trading securities are quite old practices and people have become accustomed to them. Shifting on a new product often takes substantial  time.
• Restricted Subscription – While buying a SGB the investor cannot opt lesser than 1 gram of gold. In India majority of masses buy gold in small fractions. Also, for large investors the bond have a limit of 4 kg and 20 kg respectively  for individuals and institutes.
• Lock in – Redemption of Gold Bonds can only be done after 5 years.  And to avail the tax benefit the same shall be made only after 8 years which hampers the liquidity  of funds.

Let’s take an example

And, understand deeply, what happens between when we invest the same amount in three different types Physical Gold, SGB and Gold ETF

Investment amount- Rs 1,00,000

Investment Horizon- 1 year

Annual appreciation in Gold Price-10%  [Assumed]

Average Inflation – 5% for the period 5year  [Assumed]

Individual tax slab- 10% [Assumed]

This table shows that if someone want to invest in any of the three types how much return they can get as we can see from this table physical Gold net profit is 9,000 per annum which is same as to Gold ETF but lesser than SGB which is 12,500 Net profit per year, not only this it is less risky as compared to physical Gold and Gold ETF.

*No tax has been calculated for SGB assuming they have been sold after completion of tenure.

Here are 4 things you should know about investments in Sovereign Gold Bonds (SGBs)

1. Advantage of SGBs over physical gold: The quantity of gold for which an investor pays is protected since he receives the current market price at the time of redemption/ premature redemption. SGBs offer an edge above holding gold in physical form. The risks and costs associated in the later are eliminated.

2. Investment Risk associated with SGBs: Although SGBs are benchmarked for providing highest investment safety amongst the segment. still capital loss due to reduction in market value of the metal can arise. But, even in an adverse scenario like this the investor will not incur any loss in terms of units of gold invested for.

3. Investment Restrictions in SGBs: The minimum quantity aninvestor can subscribe via SGBs is 1 gram. the further purchase can be made in multiples thereof upto

• 4kg in case of individuals and HUF. In case of joint holding, the limit applies to the first applicant.
• 20kg in case of others like trusts and government institutions etc.

The limits are for one financial year but aggregate investment in all SGB schemes during the year needs to be added together to check the limits.

4. Choose amongst all options – When a choice is required to made between physical gold, ETFs or SGBs, then SGB surely tend to stand out in terms of security, lowest purchase cost and higher returns.

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Conclusion

Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the central government. These bonds are substitutes for physical gold, denominated in grams of gold. The application to SGB can be made to

• Banks,
• Exchanges, and
• Authorised Agents, etc

In terms of return SGB offer following benefits

• An assured interest income at the rate of 2.50 per cent (fixed rate) per annum. Which is credited to investors account biannually.
• Complete tax free return when the withdrawal is made after the completion of investment tenure of 8 years. However Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (Section 43)

Being a investment in paper or DEMAT form the risk factor is minimal too.

In nutshell, if one really wishes to invest money and avail long term benefits they shall resort to SGBs. The tough lock in period help you control selling it for short term goals and paper form or DEMAT form saves your preserving cost and risk also. Also, a significant amount is not lost in making charges when your purpose is not to use the jewellery immediately rather, accumulate funds for future goals.

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