Q. What are Sovereign Gold Bonds (SGBs)?
A. Sovereign Gold Bonds, commonly known as SGBs, are government securities that are valued in grams of gold and are used as an alternative to physical gold. These bonds are issued by The Reserve Bank of India on behalf of the Government of India and they are denominated in one-gram of gold and multiples thereof, with the initial investment being one gram. These bonds are purchased with cash and redeemed for cash upon maturity. The investor's investment is safeguarded as they receive the market value of gold upon redemption, ensuring that the quantity of gold for which the investor paid is protected.
Q. Where can you purchase SGBs from?
A. SGBs can be purchased in both physical and dematerialized forms from banks, stock holding corporations, post offices and from recognized stock exchanges. To purchase these bonds, you must pay the issue price in cash and the bonds can be redeemed in cash upon maturity.
Q. How can you purchase SGBs online?
A. To buy a SGB online in India, follow these steps:
Open a Demat account: Before you can buy an SGB, you need to have a Demat account. This account holds your investment in electronic form and you can open one through any of the registered Depository Participants (DPs) such as banks, brokers, or financial institutions.
Choose a bank: SGBs can be purchased online through the websites of several commercial banks authorized by the Reserve Bank of India. Open a bank account with a bank of your choice that offers the facility to invest in SGBs online.
Log in to the bank's net banking portal: After selecting the bank, log in to your net banking account.
Navigate to the Sovereign Gold Bond section: Look for the investment or 'Sovereign Gold Bond' section on the bank's website. This section should allow you to choose the tenure, quantity and price of the SGBs you want to buy.
Fill in the details: Enter the amount of gold you want to invest in, provide the necessary details such as your name, address and PAN card information.
Make payment: Once you have filled in all the details, make the payment using your bank account linked to your net banking account. Payment can be made through NEFT, RTGS or any other online banking mode.
Receipt of confirmation and SGB certificate: After successful payment, you will receive a confirmation receipt and a digital copy of the SGB certificate. The SGB units will be credited to your Demat account within a few days.
It is essential to note that SGBs are issued in tranches and the dates of the tranches may change, so it is advisable to check the date of the current tranche before making a purchase.
Q. What is the eligibility criteria for investing in SGBs?
A. The eligibility criteria for investing in SGBs is as follows:
Individuals, HUFs, charitable trusts, universities and other trusts that are considered residents under the Foreign Exchange Management Act (FEMA) are eligible to invest in SGBs.
A guardian can invest on behalf of a child, however, a Permanent Account Number (PAN) is required to invest in these bonds.
Non-Indian residents (NRIs) are not allowed to invest in SGBs, but they can hold bonds obtained as nominees of resident investors until maturity.
In a fiscal year (April to March), an individual or HUF can invest up to 4 kg in SGBs, while trusts can invest up to 20 kg. These investment limits apply to both initial subscriptions i.e., bonds acquired through different tranches during the initial issuance by the government and those bought from the secondary market i.e., transactions on stock exchanges. However, the limit on investment does not include SGBs held as collateral by banks and other financial institutions. SGBs can be held singly or jointly, but the maximum investment limit applies only to the first holder.
Q. How are the issue and redemption prices determined for SGBs?
A. The value of SGBs is determined based on a nominal price per gram, which is calculated based on the average price of 0.999 purity gold announced by the Indian Bullion and Jewellers Association Limited (IBJA) for the previous three days of the week preceding the issue week. The redemption price of these bonds is also determined in the same way as the issue price. However, no physical gold is delivered upon redemption.
Q. What rate of interest can you earn by investing in SGBs?
A. SGBs offer a fixed annual interest rate of 2.50% on the nominal value of the bond. The interest will be credited to your bank account semi-annually and the final interest payment will be made along with the principal upon maturity.
Q. What is the maturity period of SGB investment?
A. SGBs have a maturity period of 8 years from the date of issue, after which they will be redeemed in Indian Rupees. The redemption price will be based on the simple average of the closing price of gold with 0.999 purity over the last three business days before the repayment date, as published by the India Bullion and Jewellers Association Limited. The interest and redemption amount will be credited to your bank account, which you will be required to provide at the time of purchasing the bond. The RBI or the depository will notify you about the maturity one month before the bond's maturity date.
Q. Is there a provision for premature redemption of SGBs?
A. Although the tenure of SGBs is eight years, you can opt for early redemption or encashment of the bond on any of the interest payment dates after five years from the date of issue of the bond. If held in dematerialized (demat) form, SGBs can be traded on exchanges and can also be transferred to any eligible investor.
Q. Is investing in SGB better than investing in physical gold?
A. Investing in SGBs is more advantageous than holding physical gold because of the following reasons:
It eliminates the risks and expenses associated with storing physical gold.
The investor is guaranteed the current market value of gold and periodic interest upon maturity. Unlike gold jewellery, SGBs are free from concerns related to making charges and purity.
SGBs are maintained either in the RBI's books or in Dematerialized (Demat) form, thereby eliminating the risk of losing the physical bond certificate.
Q. Can SGBs be used as a collateral for loans from banks?
A. SGBs can be used as collateral for loans from banks, financial institutions and Non-Banking Financial Companies (NBFCs). The Loan-to-Value (LTV)* ratio for such loans will be the same as that prescribed by the RBI for conventional gold loans. However, the decision to grant a loan against SGBs will be at the discretion of the respective bank or financing agency.
* Loan-to-Value (LTV) ratio is a financial term used to determine the amount of loan a borrower can get against the collateral they offer. It is calculated by dividing the amount of loan by the value of the collateral. For example, if a borrower offers collateral worth Rs. 1,00,000 and the lender offers a loan of Rs. 80,000, the LTV ratio would be 80% (i.e., 80,000/1,00,000). The LTV ratio determines the level of risk the lender is taking while lending money to the borrower. The higher the LTV ratio, the higher the risk for the lender. |
Q. What must you know before investing in SGBs?
A. A few factors that are worth noting before investing in SGBs are:
SGBs are not always available for purchase and the government sells them in tranches during specific time periods. If you wish to buy them at other times, you can do so on the stock exchanges, but this may prove to be challenging for large purchases due to low liquidity.
The issue price for each tranche of SGBs is determined by the government based on the gold prices of the preceding three business days. However, during times of high volatility, the issue price may differ significantly from the actual price of gold. SGBs also offer a discount if purchased online, which can compensate for this disparity to a certain extent.
If you wish to sell SGBs before the maturity period, you can only do so on stock exchanges in demat form, however the price you receive for the bonds may be discounted because of low liquidity. The discount may also depend on various factors such as the prevailing market conditions, the demand and supply of the bonds and the prevailing interest rates.
You should only consider investing in SGBs if you have a long-term investment horizon of around eight years as these bonds can be redeemed at the end of eight years without any tax liability. SGBs are therefore more suitable for long-term gold investors. If you prefer more liquidity you should opt for gold ETFs instead.
SGBs are cost-effective and efficient investment options for gold as there is no physical handling of gold involved and therefore no storage, safety and purity concerns apply to SGBs as compared to physical gold.
Q. What is the tax treatment for interest earned from SGBs?
A. Interest earned on sovereign gold bonds is taxable under the head "income from other sources" and is subject to taxation as per your individual tax rate. However, as SGBs are considered Government securities, no tax is deducted at source on the interest payments received. Hence, you will receive the full amount of interest earned on SGBs in your bank account. Currently, SGBs offer an annual interest rate of 2.5% on the nominal value of the bond and interest is liable to be credited to your bank account semi-annually.
Q. What is the tax treatment for capital gain on redemption of SGBs?
A. The SGBs have a maturity period of 8 years, and as per Section 47 of the Income-tax Act, redemption of SGBs by an individual will not be considered as a 'transfer' [section 47(viic)]. Therefore, any capital gain arising on the redemption of SGBs by an individual investor will not be taxed. However, you can choose to redeem SGBs prematurely after the fifth year of the issue. In the case of any capital gains arising on the redemption of SGBs (whether on maturity or premature redemption) by an investor other than an individual, it will be considered as a long-term capital gain and will be taxable. As SGBs are listed on stock exchanges in India, you can choose to compute the capital gains with or without the benefit of indexation. If the benefit of indexation is taken, tax will be charged at a rate of 20%, and otherwise, it will be charged at a rate of 10%. For instance, suppose you bought SGBs for ₹5 lakhs and received ₹6 lakhs upon redemption. In this case, with respect to capital gain arising on such redemption, no capital gain tax will be applicable to you as you are an individual assessee. However, if the same capital gain arises to a trust, capital gain tax will become applicable. The trust will be taxed at a rate of 20% if it avails indexation benefit while computing the capital gain, else it will be taxed at a rate of 10% without indexation.
It must be noted that if an individual purchases SGBs from the secondary market instead of the primary issue, the tax treatment upon redemption will remain the same, meaning it will still be exempt from tax for individuals.
Q. What is the tax treatment for capital gain on transfer of SGBs?
A. SGBs can be bought and sold on Indian stock exchanges. SGBs can also be transferred from one individual to another via secondary market (stock exchange). Any profit or loss resulting from such a transfer of SGBs is considered a capital gain and subject to taxation. If the bonds are held for more than 36 months before being sold, the resulting gain is classified as a long-term capital gain, while if they are sold within 36 months, the gain is a short-term capital gain. The tax rate for long-term capital gains is either 20% with indexation or 10% without indexation, while short-term capital gains are taxed at regular income tax rate applicable to the individual. This taxability applies even in off-market transactions. It should be noted that individuals are therefore liable for paying taxes on capital gains resulting from the transfer of Sovereign Gold Bonds, as the exemption only applies to redemption of SGBs and not transfer of SGBs.
Q. How much should you invest in SGBs?
A. SGBs are a great investment option as they provide regular income and offer tax-free capital gains at redemption. However, it is recommended that investors limit their allocation to SGBs to no more than 5-10% of their entire investment portfolio to ensure proper diversification.
Q. Why is SGB a better investment than physical gold and gold ETFs?
A. The following table summarizes the features which highlight how SGBs prove to be a better investment than the other gold investments:
Sr. No. | Parameter | Physical Gold | Gold ETF | Sovereign Gold Bond |
1. | Purchase Cost | Physical gold can be bought at prevailing market price at the moment after deducting the commission charges, as applicable. | Gold ETFs can be purchased on the stock exchange close to the prevailing market price but investors have to pay an annual expense ratio and hold a brokerage and demat account. | Each issue is priced based on price prevailing on last 3 days of the week preceding the issue week. |
2. | Fear of theft | There is risk of theft since the investor is in possession of physical gold. | They eliminate the fear of theft as physical possession of gold is not required. | As no physical gold is involved, there is no fear of theft. |
3. | Purity concerns | Purity concerns exist while investing in physical gold as there is potential for the gold to be mixed with other metals or impurities, which can affect its value and authenticity. However to a certain extent, purity concerns can be eliminated due to hallmarking which provides assurance of purity, standardization, traceability and protection against fraud. | Gold ETFs can be purchased and sold on stock exchange platforms, with units backed by physical gold of the highest purity. | Due to absence of physical gold, there are no purity concerns involved while investing in SGBs. |
4. | Storage Costs | Physical gold can be susceptible to corrosion and tarnishing, which can affect its purity and appearance. Therefore, proper storage conditions, such as keeping gold in a sealed container or a safe becomes necessary. | Storage costs are included in the ETF's management charges. | No storage costs are involved. |
5. | Interest | No interest is earned by investing in physical gold. | No interest is earned by holding a gold ETF. | Interest @ 2.50% p.a. can ne earned by investing in SGB. |
6. | Liquidity | Physical gold can be sold in the market. | Gold ETFs can be easily sold on the stock exchange. | The tenure of SGBs is eight years, but investors have the option to opt for early redemption on any of the interest payment dates after five years. Even during the first five-year lock-in period, investors can sell the bonds on stock exchanges. |
7. | Holding Costs | Physical gold must be kept safe from the significant risk of theft, so you may have to store it in bank vaults, for which you must pay a fee. | Gold ETFs are offered by reputable Asset Management Companies in India and each ETF unit is backed by physical gold purchases audited periodically by independent parties. Gold ETFs charge an annual expense ratio ranging from 0.5 to 1 per cent of assets and may also involve brokerage charges for buying and selling. | There are no holding costs involved in SGBs. In fact, SGBs are even safer than Gold ETFs since both the principal and interest on these bonds are guaranteed by the Government. |
8. | Taxability on sale/ redemption | Gains are taxed as Capital gains. | Gains on exiting the gold ETF are taxed as capital gains. | No tax if redeemed at maturity. However, taxable as capital gains if sold in the market before maturity. |
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