The Indian Government introduced the sovereign gold bond (SGB) scheme in November 2015. The aim of the scheme was to allow investors to invest and enjoy the perks of the prevailing gold rate of the market without having to think about the secure storage of physical gold. Instead, they receive a certificate confirming the purchase, and the gold generates periodic interest and does not sit idly in the locker.
Gold has always been culturally, emotionally, and financially valued in India. Experts have often suggested keeping an 8% to 10% portion of an investment portfolio dedicated to precious metals, including gold. The total valuation of the SGB’s third tranche of the 2023-24 fiscal year was INR 7,500 crore, and 2024 recorded 30% of the total subscription since the first-ever SGB issuance. These factors and numbers are enough to display and justify a consistent demand for gold-related market investments.
Government-backed security tops the list of benefits of the sovereign gold bond scheme, but it is not the only feature to look forward to. Among many advantages, its ability to keep investment safeguarded against inflation deserves special mention. It is crucial to gain a basic understanding of inflation, followed by the equation between inflation and investments. Identification of SGB’s potential against investment will then be easier, along with its comparison with other investment tools in a state of inflation.
SGB is the most cost-effective way to invest in gold offering you periodic interest with a hedge against inflation protecting your purchasing power.
Key Takeaways
- SGBs are backed by the government thereby eliminating the theft risk and storage concerns.
- SGBs protect you against inflation with their consistent demand and the intrinsic value of gold.
- They offer you periodic interest and these returns are aligned to the prices of the gold.
- If held till maturity SGBs are exempted from capital gain tax.
- They are tradeable on stock exchanges and you can also be used as collateral for loans
Inflation: Definition and Influence over Investment
Suppose you bought a pair of shoes for INR 500 in 2023. You went to buy a similar pair of shoes in 2024, but instead of INR 500, you now have to pay INR 550. The 10% increase in the price is because of inflation.
When the cost of goods and services increases, money’s purchasing power decreases. In simpler words, the value of currency decreases, resulting in fewer purchases with the same money than before. This phenomenon is called inflation. Inflation appears when the supply of money increases against the productive outcome of an economy. Imbalanced demand and supply ratio of money, changes in the cost of production and distribution cost, and increased taxes on products can lead to inflation.
Here’s a quick look towards inflation calculation:
Inflation = (WPI in the month of the current year – WPI in the same month of the previous year) * 100 WPI in the same month of the previous year.
WPI stands for Wholesale Price Index.
How Does Inflation Influence Investment?
Suppose you have kept INR 5,000 in any investment scheme at a 5% interest rate for a year. A year later, you will receive INR 250 interest. Your total returns on investment will be INR 5,250, indicating growth.
Let’s say there’s a 10% inflation rate, indicating a rise in the prices of goods and services. So, whatever commodity you could buy with INR 5,000 a year ago will now cost you INR 5,500.
What does that signify? Your investment grew, but your purchasing power was reduced.
How Do Sovereign Gold Bonds Provide Hedge against Inflation?
The answer can be easily explained in two parts.
Part 1: Understanding the Equation between Inflation and Gold
Gold has historically been able to hold its value during inflation. When prices go up, and the value of currency keeps degrading, people often lean towards gold as it is considered a safer bet. Gold’s intrinsic value, combined with its universal acceptance and consistent demand, the price can hedge against inflation.
Here’s a simple POV: regardless of the price of gold, people will keep buying gold for weddings, other special occasions, and cultural and religious purposes. Hence, the demand will prevail, allowing the price to stay afloat. Take the high inflation of the 1970s as an example here. Investors were eager to preserve their wealth, and the gold price soared.
Part 2: Establishing SGBs’ Power Play against Inflation
Let’s recap the definition and working mechanism of sovereign gold bonds here. These government securities are denominated in grams of gold. The price of an SGB is calculated per the average of the closing rate of gold (999 purity) in the last 3 business days preceding the subscription period.
Once the RBI issues the bonds, willing investors can subscribe and invest in an amount equivalent to the price of a certain quantity of gold. Sometimes, investing in an SGB means putting your money on the price of gold. On maturity or premature withdrawal, investors receive returns in accordance with the current gold price. Naturally, when the gold price remains unaffected by inflation, so will the SGB returns.
Why Choose a Sovereign Gold Bond over Gold during Inflation?
Since gold is the key factor here, direct gold investment can be an option. That said, there are many reasons to invest in a sovereign gold bond instead of physical gold.
Additional Cost
Investors may incur expenses for finding secure storage options for their physical gold. However, when you invest in SGB, you only need to hold a certificate. The certificate can be easily stored in digital form in your Demat account.
Moreover, if you opt for an online SGB investment, you can enjoy a discount of INR 50 per gram of gold.
Security
Physical gold is highly susceptible to theft, which SGB eliminates. The bonds come from the Indian Government, and needless to say, sovereign backing is the highest form of security for any investment or asset. Periodic interest and a return on maturity are assured.
Other Salient Benefits of Sovereign Gold Bonds
Besides avoiding the negative impacts of inflation, there are many more benefits from sovereign gold bonds.
Long-Term Investment Tool with Liquidity
With a tenure of 8 years and a low-risk level, sovereign gold bonds are great for fulfilling long-term investment goals. The premature withdrawal facility applicable from the 5th year offers liquidity as well. A bond can be withdrawn on the interest payment dates between the 5th and 7th years.
The bonds are tradable in the secondary market and on the stock exchange. The existing gold rate will be applicable for both premature withdrawal and resale.
Capital Appreciation
Regular interest-providing SGBs against no further income-generating physical gold show better investment potential. Even in times of inflation, when other investments lose value, gold can keep investors in a comparably better financial landscape.
Savings on Tax
Investments are generally taxed in segments. Accumulated interest is categorised as ‘income from other sources’ and taxed according to individuals’ tax slab rates. Capital gain from investments is charged with short-term and long-term capital gain (STCG and LTCG) taxes. Interest tax is applicable on SGB; however, when kept until maturity, capital gains will be exempt from taxation. The sovereign gold bond tax benefit is a crucial factor for those looking to save money on taxes.
Overdraft Facility
Many investments can be used as loan collateral, and sovereign gold bonds are no exception. Many leading banks in the country provide loans against SGBs with agreeable interest rates and conditions. The loan-to-value ratio is decided per the RBI’s regulations, while various banks have set minimum and maximum ceilings for the loan amount.
Invest in Sovereign Gold Bond with GoldenPi: Effortless Investment & Maximum Benefits
Any investment requires researching all available options, different schemes’ performance records, and a suitable platform. The investment process should also be hassle-free and quick. GoldenPi checks all these boxes, providing investors with a comprehensive platform.
You will find information on the latest SGB bond issues and all the important details on this platform. Different features and perks have been mentioned transparently to speed up your decision-making process. Expert opinion and detailed information are available to clear any queries you may have.
How do you make sovereign gold bond investments on GoldenPi?
Start by completing your KYC; it’s fairly simple, and you can upload documents online. Now, decide on the quantity of gold you want to invest in and select it. The last step is to make the payment.
FAQs About Sovereign Gold Bonds
1. Why choose sovereign gold bonds over gold ETFs?
The key reasons to invest in a sovereign gold bond instead of a gold ETF are a lower minimum investment amount, government security lowering risk factors, a fixed interest rate, and tax exemption on long-term capital gains.
2. Who is eligible to invest in the SGBs?
Persons defined as residing in India under the Foreign Exchange Management Act of 1999 are eligible for SGBs. The eligible investors’ list includes individuals, HUFs, universities, trusts, and charitable institutions. It excludes NRIs and foreign entities from eligibility. An NRI’s name can be put forward for nomination and can be held until maturity.
3. Can a minor invest in SGB?
The only way for a minor to invest in SGB is for the guardian to submit the application in the minor’s name.
4. What is the lowest investment limit for a sovereign gold bond?
The lowest investment amount for a sovereign gold bond is the equivalence of 1 gram of gold’s price. The same limit applies to all investors.
5. Is the capital gain from SGB before maturity tax-free?
Capital gains tax will apply if the bond is sold before maturity. Resale before 3 years will result in short-term capital gains and be taxed according to the individual tax slab. Capital gains from selling the bond after holding it for over 3 years will be taxed at 20% after adjusting the indexation.
6. Is TDS applicable to the bond?
No, TDS is not applicable to the bond. That said, investors must comply with interest rate tax and capital gain tax, if applicable.
7. Does RBI publish the applicable gold rate every day?
The RBI publishes the applicable gold rate on its website two days before the issue opens.
