Sovereign Gold Bonds (SGB)

 

Introduction: Overview of Sovereign Gold Bonds in India including benefits, eligibility, and key features

Sovereign Gold Bonds in India are a great way to invest in gold without actually having to purchase and store the physical metal. These bonds are issued by the Reserve Bank of India (RBI) and are backed by the Government of India. The bonds provide investors with several benefits, including capital appreciation and a fixed rate of interest.

Eligibility: Individuals, Hindu Undivided Families (HUFs) and trusts can invest in Sovereign Gold Bonds in India. Non-resident Indians (NRIs) and foreign citizens can also invest, although they must adhere to the Foreign Exchange Management Act (FEMA) guidelines.

Key Features: Sovereign Gold Bonds have a tenure of 8 years, which can be extended to a maximum of 10 years. These bonds are issued in denominations of 1, 2, 5, and 10 grams of gold. The interest rate is fixed at 2.50% per annum and is payable semi-annually on the nominal value. The bonds can be traded in the secondary market and can also be used as collateral for loans. Investors can also receive tax benefits, with the interest earned being exempt from capital gains tax.

Overall, Sovereign Gold Bonds are an excellent way to invest in gold and benefit from its appreciation in value. They also provide tax benefits, making them even more attractive.

History: How and when Sovereign Gold Bond Scheme was launched in India

The Sovereign Gold Bond (SGB) Scheme was launched by the Government of India in November 2015 as a part of the Gold Monetization Scheme. The scheme was launched by the Reserve Bank of India (RBI) on behalf of the Government of India.

The aim of the scheme was to offer an alternative investment option to physical gold that would help individuals gain exposure to gold and earn interest income on their investment. The scheme was designed to help curb the demand for physical gold in the country, which is a major contributor to India’s trade deficit.

The first tranche of the Sovereign Gold Bond Scheme was launched on November 5, 2015, for a period of five days. The issue price was fixed at Rs 2,684 per gram of gold. The scheme was very well received by investors, and subsequent tranches were launched in the following years.

Investment Purpose: Why should you invest in Sovereign Gold Bonds in India?

Investing in Sovereign Gold Bonds (SGBs) in India can offer several benefits, including:

1. High Safety and Security: SGBs are issued by the Government of India and are backed by sovereign guarantee, making them a safe and secure investment option.
2. Capital Appreciation: Similar to physical gold, the price of SGBs is linked to the prevailing market price of gold. Therefore, investing in SGBs can provide capital appreciation, as the value of gold tends to increase over time.
3. Regular Income: SGBs offer a fixed interest rate, which is paid semi-annually to investors. This interest rate is currently 2.5% per annum on the investment amount, making it a good investment option for those seeking regular income.
4. No Storage or Security Issues: Unlike physical gold, SGBs do not require any storage or security arrangements, as they are held in electronic form in the investor’s demat account.
5. Tax Benefits: Investors in SGBs can also avail of certain tax benefits. The capital gains tax on redemption of SGBs is exempt if the bonds are held till maturity. Additionally, there is no TDS (Tax Deducted at Source) on the interest income received from SGBs.
6. Liquidity: SGBs are listed on the stock exchange, making them a liquid investment option. Investors can buy and sell these bonds on the exchange, providing them with the flexibility to exit their investment whenever they wish.

Overall, investing in Sovereign Gold Bonds can offer investors a safe, secure, and attractive investment option that can provide capital appreciation and regular income, along with various tax benefits.

Pricing: How do you calculate the price of a Sovereign Gold Bond?

The price of a Sovereign Gold Bond (SGB) is calculated based on the prevailing market price of gold. The Reserve Bank of India (RBI), which issues the SGBs on behalf of the Government of India, sets the issue price for each tranche of SGBs.

The issue price of SGBs is determined based on the average closing price of 999 purity gold of the last three business days preceding the subscription period. The issue price is then fixed at a discount to the average closing price.

For example, if the average closing price of 999 purity gold over the last three business days preceding the subscription period is Rs. 5,000 per gram, and the discount is fixed at Rs. 50 per gram, the issue price of the SGB will be Rs. 4,950 per gram.

Once the issue price is fixed, investors can apply for SGBs during the subscription period. The minimum investment in SGBs is one gram, and investors can invest up to a maximum of 4 kg per individual per financial year.

The price of SGBs may also be influenced by factors such as changes in the market demand and supply of gold, fluctuations in the exchange rate, and changes in the interest rate. Investors should monitor these factors before investing in SGBs to make an informed investment decision.

Taxation: What are the taxation implications of investing in Sovereign Gold Bonds?

There are several taxation implications that investors should be aware of when investing in Sovereign Gold Bonds (SGBs) in India. These include:

1. Capital Gains Tax: SGBs are considered a capital asset, and any gains made on the sale or redemption of these bonds are subject to capital gains tax. If an investor holds SGBs till maturity, there is no capital gains tax on the redemption of these bonds. However, if the investor sells the SGBs before maturity, capital gains tax will be applicable.

If the SGBs are held for less than three years, short-term capital gains tax is applicable, and the gains are added to the investor’s income and taxed at their applicable income tax rate. If the SGBs are held for more than three years, long-term capital gains tax is applicable, and the gains are taxed at a flat rate of 20% with indexation benefits.

1. Interest Income Tax: SGBs also offer a fixed rate of interest, which is taxable as per the investor’s applicable income tax slab rate. However, there is no Tax Deducted at Source (TDS) on the interest income received from SGBs.
2. Wealth Tax: SGBs are not subject to wealth tax, as they are held in electronic form in the investor’s demat account.
3. Inheritance Tax: There is currently no inheritance tax in India, so SGBs can be inherited by the investor’s legal heirs without any tax implications.

It is important to note that tax laws are subject to change, and investors should consult a tax advisor to understand the tax implications of investing in SGBs and to make an informed investment decision.

Trading: How to buy and sell Sovereign Gold Bonds in India?

Sovereign Gold Bonds (SGBs) can be bought and sold in India through a variety of channels, including banks, stock exchanges, and designated post offices. Here are the steps to buy and sell SGBs in India:

Buying SGBs:

1. Investors can apply for SGBs during the subscription period through their bank, stockbroker, or designated post office. The subscription period is usually announced by the Reserve Bank of India (RBI) in advance.
2. Investors can also apply for SGBs online through the website of their bank or stockbroker. They need to have a demat account to apply for SGBs online.
3. The minimum investment in SGBs is one gram, and investors can invest up to a maximum of 4 kg per individual per financial year.
4. Once the subscription period is over, the RBI will allot SGBs to the investors who have applied for them.

Selling SGBs:

1. Investors can sell their SGBs on the stock exchange where they are listed. The SGBs are usually listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
2. Investors can sell their SGBs at any time after the lock-in period of five years. They can sell the bonds either through their stockbroker or through their bank.
3. The price at which the SGBs are sold will depend on the prevailing market price of gold and other market conditions at the time of sale.
4. The proceeds from the sale of SGBs will be credited to the investor’s bank account linked to their demat account.

Risk: What are the risks associated with investing in Sovereign Gold Bonds?

While Sovereign Gold Bonds (SGBs) are considered a relatively safe investment option compared to physical gold, there are still some risks associated with investing in SGBs that investors should be aware of. These include:

1. Price risk: The price of gold is subject to fluctuations and is influenced by various factors such as global economic conditions, geopolitical risks, and currency movements. These factors can cause the price of SGBs to fluctuate, and investors may not receive the expected returns on their investment.
2. Interest rate risk: The interest rate offered on SGBs is fixed at the time of issuance and remains the same throughout the tenure of the bond. If the interest rates in the economy increase during this period, the returns on SGBs may become unattractive compared to other investment options.
3. Liquidity risk: SGBs are listed on the stock exchanges, but their trading volumes are relatively low compared to other investments such as equities or mutual funds. This may lead to a lack of liquidity, making it difficult for investors to sell their bonds at a desired price.
4. Default risk: SGBs are issued by the government of India, which is considered to be a low-risk issuer. However, there is still a small risk of default, which may arise if the government is unable to honor its debt obligations.
5. Exchange rate risk: SGBs are denominated in Indian rupees, and any fluctuations in the exchange rate may affect the returns on the investment, especially for foreign investors.
6. Concentration risk: Investing in SGBs may lead to concentration risk, as the investment is made in a single asset class — gold. Diversification across asset classes may help reduce this risk.

Conclusion: Summary of the advantages and disadvantages of investing in Sovereign Gold Bonds in India.

Investing in Sovereign Gold Bonds in India offers many advantages and a few drawbacks. The main advantages of investing in Sovereign Gold Bonds include the ability to buy gold without having to physically store it, the ability to earn interest on the investment, and the security offered by the government backing the bonds. The main disadvantages of investing in Sovereign Gold Bonds are the limited liquidity, the higher premium paid on the bonds, and the fact that the gold prices may fluctuate, which could result in losses for the investor. Ultimately, investing in Sovereign Gold Bonds in India is a secure and profitable option for investors who wish to own gold without having to physically store and watch over it.

It is important to note that investors should carefully consider their investment objectives, risk appetite, and tax implications before investing in SGBs. They should also consult a financial advisor or tax expert if they have any doubts or questions regarding the investment process.