What is Sovereign Gold Bond (SGB) Scheme - Eligibility, Price, Tax Benefits & How to Buy

What is Sovereign Gold Bond (SGB)?

Sovereign Gold Bonds are government securities denominated in grams of gold. These gold bonds are nowadays used as a substitute for holding physical gold. Those who subscribe to these bonds are known as gold bond Investors. These investors are required to pay the issue price in cash and the bonds will be redeemed in cash on maturity, so no physical exchange of gold will actually be made. Sovereign Gold Bonds were introduced in 2015 under the Gold Monetisation Scheme as an alternative investment to physical gold.

In addition to tracking the import-export value of assets, it also ensures transparency at the same time.

Features of Sovereign Gold Bond

• Eligibility Criteria –
  A person has to be an 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.
• 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.
• 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.
• Price and Payment-
  An investor has the option of paying online, via demand draft or cheque, or up to Rs 20,000 via cash. On making the digital payment or online subscription, one can also avail a discount of Rs 50 for each gram.
• 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.
• 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
• KYC Documentation-
  Investors must follow the Know Your Customer (KYC) norms while buying physical gold. Hence, the KYC documents like a copy of a driver's license, PAN Card, passport, or Voter ID needs to be kept.
• Tax Treatment-
  There is no tax on the proceeds of sovereign gold bonds 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. This means the tax implications 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)
• Sales Channels-
  The government sells bonds through banks, Stock Holding Corporation of India Limited (SHCIL), and selected post offices as may be informed. The trading also occurs via stock exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchanges (NSE) of India directly or through intermediaries.

Who Issues Sovereign Gold Bonds?

Sovereign Gold Bonds (SGBs) in India are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. These bonds are a financial instrument that allows individuals to invest in gold without physically owning it. SGBs are denominated in grams of gold and offer investors the opportunity to earn interest, along with the potential for capital gains linked to the price of gold.

What are the Various Sovereign Gold Bond Schemes for the Year 2024-25?

Update:
The Reserve Bank of India (RBI) is likely to announce the first tranche (Series 1) of the Sovereign Gold Bond (SGB) 2024-25 in June 2024, based on past trends. Typically, the RBI releases four SGB tranches throughout the financial year (April-March), beginning with the Series 1 issuance in June. However, the RBI has not yet made an official announcement regarding the SGB 2024-25 series.

The final tranche of Sovereign Gold Bonds (SGBs) for the 2023-24 series opened for subscribers on February 12, 2024, and will close on February 16, 2023. If the application is successful, the allotment will be made on February 21.

The price history of SGB for FY 2023-24 is as follows:

The price history of SGB for FY 2022-23 is as follows:

The price history of SGB for FY 2021-22 is as follows:

How to Buy Sovereign Gold Bond?

To buy Sovereign Gold Bonds (SGBs) in India, you can follow these steps:

• Check Issuance Dates: The RBI announces specific issuance dates for SGBs. These dates are when the bonds are available for purchase.
• Approach Authorized Entities: You can buy SGBs through various authorized entities like commercial banks, designated post offices, the Stock Holding Corporation of India (SHCIL), and recognized stock exchanges such as NSE and BSE.
• Submit Application: Fill out the application form available with the authorized banks or entities during the issuance period. You'll need to provide details such as your name, address, PAN (Permanent Account Number), and the amount of gold you wish to invest in terms of grams.
• Payment: Pay the required amount as per the current market price of gold. You can pay through cash, cheque, demand draft, or online banking, depending on the options provided by the specific entity.
• KYC Compliance: Ensure compliance with KYC (Know Your Customer) norms. You might need to submit identity and address proofs along with the application.
• Allotment: After the closure of the issuance period, the RBI will allot the bonds. You'll receive an allotment advice and a Certificate of Holding confirming the ownership of the bonds.
• Interest Payments: SGBs pay an annual interest, which is credited semi-annually to the investor's bank account. The final redemption amount includes the principal along with the accrued interest upon maturity.

How to Buy SGB Online?

Given below are the steps to invest in or buy sovereign gold bonds in India -

• Step 1. Log in to your net banking account.
• Step 2. Select the ‘eServices’ option and then choose ‘Sovereign Gold Bond’.
• Step 3. Read the terms and conditions, then click ‘Proceed’.
• Step 4. Complete the registration form and click ‘Submit’.
• Step 5. Enter the subscription quantity and nominee’s details in the purchase form.
• Step 6. Click ‘Submit’ after providing all the details.

Who Should Invest in Gold Bonds?

Residents in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

What are the Distinguished Features of Gold Bonds?

Many distinct features of gold bonds make it an attractive investment option, too. Like,

• It can also earn you a fixed-interest income bi-annually.
• The expenses for selling and buying this SGB are nominal as compared to the physical gold.
• The 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 collateral.

What is the Minimum or Maximum Quantity a Person Can Buy Through Gold Bonds?

The minimum quantity that a person can buy is 1 gram. Whereas,

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

These limits are to be calculated for all the bonds subscribed during one financial year. In the 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 authorized to collect the application form and submit to banks and post offices. 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 several factors as follows:

• 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.
• These bonds are free from issues like making charges and purity in the case of gold in jewelry form.
• The bond is issued by the Reserve Bank of India on behalf of the government.
• The bonds are also distributed through banks and designated post offices.

What are the Various Advantages of Sovereign Gold Bonds?

• Absolute safety
  Sovereign gold bonds carry none of the risks that are associated with physical gold, except the market risks because it is in paper form so the risk is less stealing. There is no hefty design charges or TDS. Therefore stealing factor does not come into the picture or change its ownership
• 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 their 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 gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issue). For instance, the minimum period is 8 years 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 HDFC banks, etc.

How SGB (Sovereign Gold Bonds) are Different From Physical Gold Purchases and Gold ETFs (Exchange Traded Funds)?

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

LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison

Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.

Taxation for mutual funds

What are the Tax Benefits of Sovereign Gold Bonds?

Regarding capital gains, Sovereign Gold Bonds are redeemed at the end of 8 years. Any capital gains you earn at the end of 8 years will be considered entirely tax-free. The government extends this tax benefit to encourage investors to invest in Gold Bonds instead of physical gold.

However, the tax treatment differs if you exit your Gold Bond investment earlier. There are two popular ways to exit a Gold Bond investment: the first is via the early redemption window at the end of 5 years, and the second is to sell your bonds in the secondary market. In both cases, capital gains will be taxable according to the usual definition of short-term and long-term capital gains. If it is the former, the rate applicable will be at its peak. If it is the latter, then the investor can choose between a flat tax rate of 10% or 20% after considering indexation.

Thus, overall, investing in Sovereign Gold Bonds and holding on until the redemption period is over could result in tax benefits that help you save a considerable sum while filing taxes. Plus, you can easily store your Gold Bonds without having to deal with the worry of storing physical gold.

Furthermore, Sovereign Gold Bond tax benefits occur at three levels. Firstly, you receive interest at the rate of 2.5% on your Gold Bond holdings. This interest is entirely taxable, that too, at the peak rate of tax. Thus, if you are in the 30% tax bracket, you will have to pay tax on whatever interest you earn via Gold Bonds. Note that since tax Deducted at Source (TDS) is not applicable on Gold Bonds, you will have to show this income when you file your returns and pay advance tax accordingly.

Want to know how tax can impact your investment in Sovereign Gold bonds and how you save the maximum, connect with our experts.

Thus, overall, investing in Sovereign Gold Bonds and holding on till the redemption period is over could result in tax benefits that help you save a considerable sum while filing taxes

Taxation On Gold: SGB vs Gold ETF vs Physical Gold

Tax On The Sale Of Physical Gold

If you make a profit selling gold, you might have to pay capital gains tax on the earned profit. The taxation of gold sales is determined by how long you've held it—either as short-term capital gains or long-term capital gains.

Long-Term Capital Gains (LTCG) Tax:

If you sell gold and silver after holding them for more than three years i.e. more than 36 months, you may be subject to long-term capital gains tax. The tax on LTCG on gold and silver is subject to a fixed rate of 20 per cent and a four per cent cess, with the added advantage of indexation.

Short-Term Capital Gains (STCG) Tax:

If you sell gold and silver within three years of purchase, i.e., before 36 months, you may incur short-term capital gains tax. The STCGs are taxed based on the applicable income tax slab rate.

Tax On Sale Of SGBs:

It is the substitute for holding physical gold. You can redeem the bonds after eight years of maturity. However, you can redeem the bonds at the end of five years of purchase, too. The taxation rules are:

Redemption On Maturity i.e., After Eight Years, Is Tax-Exempt

If you redeem within the initial five years, it will be classified as LTCGs. LTCG from SGB is subject to a 20 percent tax rate with indexation benefits or a 10 percent rate without indexation benefits. The interest earned on SGB is not exempt from taxes and is reported as income from other sources.

Tax On Sale Of Gold ETF

The taxation of gold ETFs and gold saving funds purchased before and after March 31, 2023, is distinct, impacting their capital gains treatment:

Pre-March 31, 2023:
Treated and taxed similarly to physical gold.
Qualify as long-term capital assets if held for 36 months or more. Will be taxed at 20 per cent with indexation benefits.
Taxation occurs upon sale or redemption.

Post-March 31, 2023:
Taxed as short-term capital gains regardless of how long you hold it.
Taxation occurs upon sale or redemption.
Will be taxed at slab rates.

Here’s an example to help you understand the investment in different types of physical gold, Gold ETF, and SGB -
Investment amount- Rs 1,00,000
Investment Horizon- 1-year
Annual appreciation in Gold Price-10% [Assumed]
Average Inflation – 5% for the period 5 year [Assumed]
Individual tax slab- 10% [Assumed]

This table shows that if someone wants 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 Gold ETF but lesser than SGB, which is a 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.

Hope this article helped you understand everything that you need to know about sovereign gold bonds. Sovereign gold bonds are not just a great investment but also a popular tax-saving investment option.

However, remember that whether you hold gold in physical form, gold ETF or a sovereign gold bond (SGB), you have to report them in your ITR to claim a tax benefit.

ITR Filing for FY 23-24 has begun, and your can file your ITR yourself in less than 4 minutes with Tax2win’s AI-integrated smart ITR filing software. And if you find taxes complicated, you can also connect with our tax experts and get a CA-assisted ITR Filing Service. File ITR Now!