What are Sovereign Gold Bonds and How Do They Work?

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Gold has symbolized not only wealth but also cultural and emotional value in India since ancient times. Buying gold on special occasions is still considered auspicious. 

It is no secret that the people in the country have, time and again, opted for gold investment over many alternatives, even those offering greater returns. 

Gold has symbolized not only wealth but also cultural and emotional value in India since ancient times. Buying gold on special occasions is still considered auspicious. It is no secret that the people in the country have, time and again, opted for gold investment over many alternatives, even those offering greater returns. 

Considering the worth of gold in terms of finance and otherwise, various gold schemes have been launched in the market over the years; sovereign gold bonds are among the most popular ones!

In 2015, the Government of India introduced the SGB or Sovereign Gold Bond Scheme. Investing in sovereign gold bonds allows individuals to invest in gold without the need for physical storage, while also offering the benefits of capital appreciation and periodic interest income. The idea was to allow investors to reap benefits by investing in gold without the need for physical possession. The record subscriptions in FY24, which are 3.62 times higher than in FY23, show the demand for these bonds.

For those yet to add a sovereign gold bond to their investment portfolio, a thorough study of these securities is definitely suggested. Those who have already invested in these bonds or have some basic knowledge about them will benefit from a more in-depth look at how these bonds are issued and how they function!

Key Takeaway 

1. In consultation with the Government of India, RBI issues SGBs 
2. They are measured in terms of denomination of grams of gold 
3. The minimum investment required is equal to the 1 gram of gold price 
4. The maximum investment for individuals and HUFs is up to the price of 4 kg of gold and for trusts and corporations up to the price of 20 kg of gold per fiscal year.
5. The tenure of SGB investment is 8 years with premature withdrawal allowed after 5 years.
6. The interest rate is paid semi-annually 
7. You can purchase SGBs via banks, brokers, online entities and post offices 
8. You are exempted from long-term capital gains if held till maturity 
9. The redemption price depends on the average closing price of 999 purity price of gold over the previous 3 working days before redemption.
10. SGBs after 2 weeks of holding, it is tradable on stock exchanges from the day of subscription with price depending on the gold’s market rate and the ratio of demand and supply.

The Question of the Hour: What is a Sovereign Gold Bond?

The RBI,  Reserve Bank of India, issues sovereign gold bonds in consultation with the government. The government securities are denominated in grams of gold. Here, each bond represents 1 gram of gold, and the sovereign gold bond price will rise and fall with the price of gold.

Gold prices are less likely to be influenced by market fluctuations, and gold bonds are counted among the safer investment instruments. Consider these a safer and more convenient alternative to physically buying and storing gold. Investors subscribing to these bonds pay the issue price online, receive the bond certificate, and can redeem the bond online on the day of maturity. These bonds allow investors to reap financial benefits from high gold prices and government-backed security.

The Purpose behind SGB

It was introduced by the Government of India to find an alternative to Gold investments that offer convenience and security while reducing the demand for gold to be imported. It also promotes savings in households making it a productive investment.

How Does a Sovereign Gold Bond Work?

In a fiscal year, the RBI  issues sovereign gold bonds in tranches under Government of India stocks. The bond issuance is announced through a press release every 2 to 3 months. A specific window (generally 1 week) is predetermined for allowing investors to subscribe to the bonds. Only once a sovereign gold bond is successfully purchased is the holding certificate issued in the investor’s name.

Note: Tranches refer to securities’ collections, separated and grouped according to different characteristics and offered to investors. The maturity dates, credit ratings, and interest rates can differ for tranches.

As investors, to prepare for the investment process of  a sovereign gold bond issuance, subscription, and purchase, the following factors must be kept in mind:

• Sovereign gold bonds can be purchased via banks, post offices, brokers, and online entities. 
• Besides direct purchases from the RBI, investors can opt for unit purchases through stock exchanges or the secondary market.
• A discount of INR 50 per gram of gold is offered for digital purchases. This is to encourage investors to shift to digital investments.
• Both digital and dematerialized forms of bonds are obtainable. Investors are free to request a bond transfer to their respective demat accounts after completing the physical purchase.
• The bonds will remain in RBI’s record until the dematerialization is done. Dematerialization is also possible after allocation.

How is the price of an SGB issue determined?

The issue price is decided by the Government of India on behalf of the RBI. The issue price is the average of the last 3 business day’s closing price of the 999 purity gold which is normally announced by the India Bullion and Jewellers Association Ltd. 

Suppose the SGB is issued on July 10 to 17, the prices on July 3, 4, and 5 of the 999 purity gold being 6000, 6050, and 6100. The average of these prices is taken into account for the issue price. That is (6000 + 6050 + 6100) / 3 = 6050. Therefore the issue price of SGB on July 10 to 17 is 6050 Rs.

Important Features of Sovereign Gold Bonds

Investors will require the following information to understand their eligibility and the bonds’ utility in fulfilling investment goals:

Eligibility

Indian residents, including individual investors, HUFs (Hindu Undivided Families), trusts, universities, charitable institutions, and corporations, can purchase sovereign gold bonds. One can also invest on behalf of a minor.

Minimum & Maximum Subscription Cap

The minimum investment amount must be equivalent to the price of 1 gram of gold. The maximum amount varies depending on the investor. The upper investment cap equals the price of 4 kg of gold for HUFs and 20 kg for corporations and trusts.

Tenure & Premature Withdrawal

Sovereign gold bonds come with 8-year-long tenures. The minimal holding period is 5 years; premature withdrawal will be permitted only after that.

Investors can exit the bond on the 5th, 6th, and 7th years of bond tenure, but only on the interest payment dates. A request for premature redemption can be made 30 days before the interest payment date via the concerned bank, post office, offices of Stock Holding Corporation of India Limited, or agent. The last date for the request is one day before the interest payout date. 

Coupon Rate & Periodic Payouts

RBI announces the interest or coupon rate at the time of trance launch. The interest is paid semi-annually, twice a year. 

Redemption Price

Once the bonds mature, the redemption price is decided depending on the average closing price of gold of 999 purity in the previous 3 working days. IBJA, or India Bullion and Jewellers Association Ltd., is responsible for publishing the same.

Resale

Sovereign gold bonds can be resold in the secondary market after 2 weeks from the subscription date, subject to RBI’s notice. Investors must hold a digitized certificate stored in a Demat Account to trade bonds in the stock market. The resale price depends on the prevailing gold price and the demand-supply ratio in the market.

Taxation Rules

The taxation is pretty straight:

Capital Gains Tax

If you hold an investment till maturity that is 8 years, the capital gain tax is 0, otherwise, it attracts short-term capital gain tax if sold before 3 years as per individual’s tax slab or long-term capital gain tax if sold after 3 years, it is taxable for 10% without indexation or 20% with indexation.

Interest Income Tax 

The interest earned is taxable as per the individual tax slab.

SGB as Collateral

SGB also has the benefit of serving as collateral for taking a loan, which reduces the hassle of looking out for a loan. Up to 75% of the investment amount of the market value of the SGB is considered by the banks and financial institutions to give loans.

The SGB when used as collateral provides liquidity without having to sell the bonds and still continue to earn interest on it. The interest rate on these loans is lower than the unsecured loans. Therefore this offers flexibility and cost cost-effective way of accessing funds.

Who Should Consider Investing in Sovereign Gold Bonds?

It is most suitable for the following customers:

• The long-term investor who ideally wants to invest for 5 to 7 years long investment.
• Risk-averse investors who prefer the safety and stability of an investment.
• Investors seeking regular income can receive a mighty interest income twice a year.
• Tax-conscious investors who want to save on capital gains and want to receive indexation benefits for holding for 3 years.
• Investors who are comfortable holding gold-related investments in digital format for ease and convenience.
• Ideal for investors who want to diversify their portfolio with gold without storing physical gold.
• Those investors who look for a hedge against inflationary pressure.

Previously Issued Sovereign Gold Bonds

Here are some sovereign gold bonds issued in the previous fiscal year.

Sovereign Gold Bonds Return Calculation

Suppose an investor has invested in 10 units, 1 unit being equal to 1 gram or 1 bond, under Series I of SGB 2022-23. The price of each unit or bond is INR 5,091, and the semi-annual interest rate is 2.5%. Here’s how to calculate the cash flow.

Key Benefits of Investing in a Sovereign Gold Bond

Here are the factors that generally convince investors to opt for sovereign gold bonds.

• Low Investment Value: An investor can start an investment with a minimum amount as low as 1 gram of gold.
• Safe & High Returns: 2.5 % interest per annum is assured by sovereign backing.
• Capital Appreciation: The market rate of gold tends to stay high, creating better opportunities for the investment to grow.
• Tax-Saving: The long-term capital gains are tax-exempted if the bond is held till maturity.

Limitations of Sovereign Gold Bonds

• Like the benefits, the instruments have few limitations
• The tenure of staying invested is 8 years long with a premature withdrawal allowed only after the 5th year.
• The interest income earned is taxable as  per the individual tax slab rate
• The prices are linked to the gold and can be volatile.
• Depending on the demand in the secondary market the selling can be limited.
• The person must have digital knowledge to understand the transactions and open a demat account.
• To be making returns out of an investment, you must stay in it for 8 years.

Why Choose Sovereign Gold Bond over Physical Gold?

Seeing the benefits over physical gold, SGB can help you in:

• Since it is held in digital format there is no risk of theft and storage concerns.
• In addition to the capital appreciation, it offers an interest of 2.5%.
• Capital gains are tax-free if held till maturity.
• It has no making or storage cost like that in physical gold.
• It can be easily traded on the stock exchange 
• It can act as a collateral for loan.
• It is linked to the value of the 999-purity gold
• Pricing is accurately related to the average closing price of the last 3 business days of the week preceding the subscription of 999 purity gold.

How to Buy Sovereign Gold Bond: Quick & Easy Investment Guide with GoldenPi

Invest in sovereign gold bonds with GoldenPi and enjoy a seamless experience. From lists of the latest issuances to all the required information on each bond, you will be carefully guided through each process. 

You can purchase the sovereign gold bond of your choice in 3 simple steps:

• Complete the KYC on GoldenPi.
• Enter the quantity in grams that you want to purchase.
• Finalize the payment.

Relax and enjoy period payouts, capital growth, and assured returns on maturity!

FAQs About Sovereign Gold Bonds

1. What are Sovereign Gold Bonds and How Do They Work? 

Sovereign Gold Bonds (SGBs) are securities backed by the Government of India, and issued by the Reserve Bank of India (RBI). It is denominated in grams of gold and each bond is a representation of 1 gram of gold. They offer investors the opportunity to invest in gold without needing to store any physical form of gold. It offers an interest rate which is paid twice a year with a tenure spread over 8 years and has a premature withdrawal option available after 5 years.

2. Is the accrued interest on a sovereign gold bond subject to taxation?

Yes, the accrued interest is treated as regular interest and is charged as per your tax slab as it is treated as income from other sources.

3. Is the capital gain from the resale in the secondary market taxable?

The capital gains from reselling sovereign gold bonds in the secondary market will be taxed per individual tax slab if held for less than 3 years and at 20% of the total income after adjusting the indexation when held for more than 3 years.

4. Can a sovereign bond be used as collateral for loans?

Yes! You can apply for a loan up to 75% of the bond’s market value, as per the RBI’s  LTV regulations.

5. What are the required KYC documents for investing in sovereign gold bonds?

Identity proof such as an Aadhaar card, PAN, TAN, passport, or  Voter ID Card will be required to complete the KYC.

6. Are sovereign gold bonds transferable?

Sovereign gold bonds can be transferred. The bondholder needs to sign a transfer instrument in accordance with the Government Securities Act’s guidelines.

7. Is joint holding allowed for sovereign gold bonds?

Sovereign gold bonds are open for joint holding.

8. What are the available payment options for sovereign gold bonds?

To invest in a sovereign gold bond, you can make cash payments (up to INR 20,000), cheques, demand drafts, and electronic fund transfers.