What are Gold Bonds?
Sovereign gold bonds, also known as SGB, are investment bonds linked to gold prices issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The gold bonds are sold in the form of units, meaning that each unit is equivalent to one gram of Gold that has 99.9% purity. This sovereign gold bond scheme is a very good investment product that the government recently launched to make use of the growing need for gold among Indians while at the same time, offer them a facility to store Gold in a digital form and also helping them generate returns over it.
What is a Gold Bond?
As mentioned, the sovereign gold bonds are priced as per the price of Gold. It is possible to purchase an SGB gold bond in units, with each unit representing one gram. While the minimum investment is one gram, you may buy more units in the multiples of one gram (gm). The maximum amount of Gold you can purchase through gold bonds is 4kgs per year per investor. The SGB price is determined using an average of the closing prices for Gold during the last three working days before the period of subscription. The redemption price is calculated based on the most current information taken from the closing prices released by the India Bullion and Jewellers Association Limited (IBJAL).
Sovereign Gold Bond Returns: The major advantage of the sovereign gold bonds scheme is that it offers a Fixed interest rate of 2.50 per year, payable every six months in a year, on your initial investment.
Tenure of Investment: The duration of investment in this gold bond scheme is eight years. You can choose to redeem your investment after five years. If you are looking to exit before maturity, there is an option to sell these bonds at any time through the exchanges. You are required to note that if the bonds are sold through electronic platforms like market exchanges, relevant capital gains tax is applicable on the same at the prevailing rate and will treat the same manner as that of physical Gold.
Holding Certificate: On successful SGB registration and application, the sovereign gold bond certificate shall be available for download, which is also called the Certificate of Holding, on the date of issue. If you have invested in SGB through banks or any other financial institution, the holding certificate may be taken from them directly. There is also a facility to nominate a person for this investment, which you may utilize at the time of application or later depending on the requirement and need for future investments, considering the situations that may arise then.
Benefits of Investing in SGBs
The gold bond scheme is in demand among Indians due to India’s large number of gold consumers. Due to this, the RBI is launching the SGB investments in multiple tranches. Therefore, you must know the real benefits of investing in SGB’s, which are explained below:
- You can expect a guaranteed return of 2.5 percent annually to be paid half-yearly, which is quite high because this 2.5 percent is over and above the returns offered by Gold. You’ll get this guaranteed return along with the price movement of your SGB, meaning, when the gold price increases, the value of your SGB also increases. If you buy physical Gold, there is no possibility to earn any additional interest or annual returns.
- The storage is secure and offers a hassle approach in redemption as well. In contrast to physical Gold, the SGB is fully secured. It is not necessary to be concerned about the security of your SGB storage since it doesn’t have to be stored in physical spaces. Banks can buy SGB on the internet.
- The gold bonds are Simple to sell and can be easily traded on exchanges. Selling Gold in physical form at the current market rate might not be an easy task for many. On the other hand, the SGB can be sold quickly at market prices through exchanges with enough liquidity.
- There is no need to pay any capital gain tax on the redemption of SGB holdings, which is a facility that is not available in the case of possessing physical Gold.
- It is also possible to use your SGB holdings as collateral for loans when you want to apply for a loan from banks. This is a facility similar to physical Gold, which you may pledge with banks or gold loan companies to get loans.
- Finally, there are no extra charges to be paid with SGB. There is no GST, and no making charges are required as opposed to physical Gold. But, while buying physical Gold, GST and making – charges are levied.
How to purchase a gold bond
Sovereign Gold Bonds can be purchased through commercial banking institutions, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Ltd. (CCIL), designated post offices, and stock exchanges, such as those of the Bombay Stock Exchange and the National Stock Exchange.
If you consider buying SGBs, whether during the issue period or via stock exchanges, be sure you know the benefits and drawbacks of investing. If you choose to invest in SGB, know that you can purchase the gold bonds from previous tranches also directly from the exchange.
SGBs are designed to help facilitate gold investments without the hassle of storage. So, a majority of people who purchase these bonds have a long-term view when making investments. Diversifying your investments in multiple asset classes is very important to avoid only getting caught in one asset class. Therefore, SGBs are the perfect way for you to branch your investments into precious metals as an investment class within your portfolio. At the same time, remember to be aware of all the important details of the scheme before deciding to invest.