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.


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.


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

S NoIssue SeriesIssue YearSubscription PeriodIssue Date
1Series II2018-1915-19 Oct, 201823 Oct, 2018
2Series III2018-1905-09 Nov, 201813 Nov, 2018
3Series IV2018-1924-28 Dec, 201801 Jan, 2019
4Series V2018-1914-18 Jan, 201922 Jan, 2019
5Series VI2018-1904-08 Feb, 201912 Feb, 2019

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.


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.

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.

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.


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.


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

S NoParticularsSGBETFPhysical gold
1What these schemes meanThese are the gold bonds issued in paper form by the government and can later be converted into  DEMAT form also. There is no physical gold consorted against such bonds. You can get the payment on maturity and purchase physical gold from market under this option. Gold ETF – are the securities equivalent to gold prices traded over the stock market. These can be purchased by anyone trading online during the trading hours. Can be sold and purchased at the convenience of buyer. No gold is actually taken or given. You can purchase gold by selling the securities and realising the money.This is what we all have witnessed in our households and society since ages. In this conventional method actual metal gold is purchased from the market. This is generally stored in form of gold ornaments or articles. With the possession of physical gold, there comes a high risk of theft and keeping it safe.
2Lock In8 year but money can be withdrawn at 5th ,6th and 7th year as wellNo lock-in period can be purchased and sold online anytime.No lock in under this mode too. It can be sold in the open market as per the will of investor and immediate cash can be realized.
3ReturnReturns are generally higher due to periodical interest earned on bonds + lower purchase value because of no making chargesReturns are lower than actual gold returns. The reason being loss due to trading charges and taxes for making transactions through stock exchange.Returns are normally lower due to high making charges involved.
4TaxabilityNo tax if sold after complete 8 years tenure.(Otherwise Capital gain tax is leviable as per normal provisions)Capital Gains tax is levied as per the provisions of Income Tax Act. i.e LTCG is payable @ 20% after three yearsCapital Gains tax is levied as per the provisions of Income Tax Act. i.e LTCG is payable @ 20% after three years
5Minimum Purchase QuantityMinimum amount one can buy bonds of shall not be below 1 grams.No minimum purchase quantity has been prescribedAny quantity can be purchased  as per the will of purchaser. Even if the same is below 1 gram.
6Purchase CostLow as the same is borne by the government. Infact online purchased and digital payment further reduces purchase cost by Rs 50 per gram.In comparison to SGB the purchase cost is high as trading charges, commission and relevant taxes are payable.Highest purchase cost due to huge making charges imposed by the seller.
7Purity of GoldHighestHighestLowest
8LiquidityLeast liquid option amongst these three. Because it cannot be sold before 5 years (minimum).High Liquidity because  can be sold online during the trading hours.Highly Liquid
9CollateralCan be kept as collateralCannot be used as collateral for securing loansCan be used for collateral  purposes.
10Safety of GoldLeast risk as to theft because security is hold either in paper or DEMAT  form.Risk is negligible due to electronic transfer of traded units.Highest in risk. Resulting from physical possession of the gold metal.

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.


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.


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.


FAQs

Can a Minor invest in SGB?

Yes a minor can apply though his / her guardian. No direct application can be made in this case.


If I apply, am I assured of allotment?

Yes, if you make all the compliances correctly you can be sure about the allotment. Such compliances are

  • Meeting the eligibility criteria,
  • Producing a valid identification document
  • Remittance of application money etc

Can I apply online?

Yes, an online application can be made through the website of the listed scheduled commercial banks. Infact, the subscription can be made at Rs 50 less per gram when it is made online and the payment is also done though digital mode.


How can I exit my investment in SGB?

For premature withdrawal investors can file a request before 30 days of coupon date to requisite

  • Banks
  • SHCIL
  • Post Offices
  • Agent etc

The time period can further be reduced on request but shall in no case be lesser than one day before the coupon date. on successful processing of the application payment would be credit to registered bank account of the investor.


Can I use these securities as collateral for loans?

SGB can be used at par for taking up of loans as done in case of ordinary gold. The loan to value ratio will depend on the RBi circulars issued from time to time. SGB can work as eligible collateral for taking up loans form

  • Banks
  • Financial Institutions and
  • Non Banking Financial Companies (NBFC)

What are the tax implications on i) interest and ii) capital gain?

Interest on the Bonds is taxable as per the provisions of Section 43 of the Income-tax Act, 1961. The capital gains tax on redemption of SGB is exempted for individuals. also, indexation benefit on long term capital gain will be available for everyone on transfer of bond(s).


What are the payment options for investing in the Sovereign Gold Bonds?

Payment can be made in any of the following ways

  • Cash (upto ? 20000)
  • Cheques
  • Demand Draft
  • Electronic Fund Transfer.

What is the procedure to be followed in the eventuality of death of an investor?

In the eventuality of death of an investor following two conditions can be encountered

  • A nominee has already been appointed

in this case the nominee shall approach Receiving Office to file its claim. The claim will be recognized on the guidelines set under the provisions of Government Securities Act, 2006.

  • No nominee was appointed

If no nomination has been made then executors or administrators of the deceased investor or holder of succession certificate shall submit their claim to the Receiving Office or Depository.

The same process needs to be followed in case of minor investor too. But if the resulting beneficiary is minor than the title shall be transferred in name of person fulfilling the government’s eligibility criteria.


How can I post my queries regarding Sovereign Gold Bond to RBI?

Reserve Bank of India has given a dedicated e-mail id i.e. sgb.rbi.org.in for the public to ask their queries. You can mail your query to the given mail id relating to issues on Sovereign Gold Bonds.


10 Are there any risks in investing in SGBs?

Normally, there are no chances of incurring loss while investing in SGB. But, there might be a scenario when the prices of gold fall over the time period. Even in this situation a person will not lose in terms of units of gold. The unit of gold purchased at the time of investment will remain same.


Can I encash the bond anytime I want? Is premature redemption allowed?

The redemption of bond is done after 8 years from the date of purchase. But, premature redemption is allowed form the 5th year itself. In case an investor wishes to liquidate the investment even before 5 years then the same can be transferred to other eligible person offline or offline if held in demat form.


At what price the bonds can be purchased?

The prices are announced by RBI with every announcement of tranche. the nominal price is computed on the basis of simple average of closing price of gold of 999 purity. Where, the closing prices are published by the India Bullion and Jewelers Association Limited. The last 3 business days of the week preceding the subscription period are to be considered for this calculation.


Who is eligible to invest in the SGBs?

The eligible investors for Sovereign Gold Bonds are

  • Individuals (resident in India)
  • HUFs
  • Trust
  • Universities and
  • Charitable Institutions

An individual investors who occupied SGB at the time of being resident in India can continue to hold SGB till early redemption/maturity.


Can NRI buy Sovereign Gold Bond ?

No, NRI though allowed to invest in all other gold funds and ETFs, cannot subscribe to SGBs. But, if an NRI hold SGB as a result of its earlier status as resident Indian then the same is allowed subject to

  • Non repatriation of interest or maturity amount to india
  • Hold the bonds till early redemption/ maturity

Can SGB be holded jointly?

Yes, joint holding is allowed in case of gold bonds.


Where I can get the application form?

The application form can be taken form nay of the following organisations

Banks may also depending upon internal policies, provide online application facility.


What are the KYC norms?

Every application for SGB shall be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s). and, the same suffice for the Know Your Customer norms.


Can an investor hold from more than one investor ID for subscribing to the Sovereign Gold Bond?

No. An investor cannot have more than one unique investor Id linked to any of the prescribed identification documents. The same unique investor ID is also to be used for all the subsequent investments in the gold bond scheme. Also, for holding securities in dematerialized form, quoting of PAN is mandatory while filling up the application form.


What is the time limit for issue of Holding Certificate?

The Certificate of Holding is issued to the customer on the date of issuance of the SGB itself. The certificate can be collected either from

  • The issuing banks
  • SHCIL office
  • Post Offices
  • Designated stock exchanges
  • Agents or
  • RBI directly on email*

(if email address is provided in the application form.)


What is the selling price of the gold bonds?

The nominal value of Gold Bonds shall be in Indian Rupees. It is fixed on the basis of simple average of closing price of gold of 999 purity. The same is published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period. A person subscribing online and making payment in digital mode gets subscription at Rs 50 lower than the actual value for each gram.


Will RBI publish the rate of gold bonds every day?

No, the RBI does not publish gold prices everyday. Instead, the price for the relevant tranche is announced on Reserve Bank of India’s official website two days before the issue opens.


What amount will I get on redemption of SGB?

The redemption value of gold bonds will be based upon the simple average of closing price of gold of 999 purity. Which is to be taken for previous 3 business days from the date of repayment. It is to be published by the India Bullion and Jewelers Association Limited. The amount will be transferred to the bank account and in indian rupees.


What is the SGB redemption procedure?

To redeem SGB follow the process mentioned below

  • The investor shall inform the requisite authority i.e. bank, post office etc at least before 30 days of the coupon date about the redemption desired.
  • The application for redemption can in no case be filed for later than one day before the coupon date.
  • On successful acceptance of the application, redemption proceeds will be credited to the bank account of the investor.
  • If any changes have taken place in the particulars like bank account number, email ids, etc then the investor must intimate the bank/SHCIL/PO promptly.

Can SGB be gifted to a relative or friend on some occasion?

If your friend or relative fulfills the eligibility criteria then these bonds can be gifted or transferred on their names. The transfer procedure shall be governed by the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity. It shall be done by execution of an instrument of transfer. The same is available with the issuing agents.


Whether nomination can be made for these investments?

Yes, nomination facility is available as per the Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form is attached with the Application form. A NRI can be nominee and as  a result can get SGB transferred on his own name but

  1. The NRI  investor will be required to hold the security till early redemption or till maturity; and
  2. The interest amount and maturity proceeds of the investment will not be repatriable.

From where I can find RBI circular on SGB?

You can download all Reserve Bank of India circulars on sovereign Gold Bonds from https://rbi.org.in/Scripts/BS_SwarnaBharat.aspx


Is tax deducted at source (TDS) done on the sovereign bond?

No, since the redemption on maturity is tax free no TDS is applicable on the bond. However, the investor shall comply with the tax laws.