Sovereign Gold Bonds are Essentially Government Securities that are Denominated in Grams of Gold
Sovereign Gold Bond – Meaning
The Sovereign Gold Bond Scheme (SGB) is a government-backed investment scheme launched in November 2015 by the Reserve Bank of India (RBI) on behalf of the Government of India. It is a secure and convenient way to invest in gold without having to physically hold it.
What are Gold Sovereign Bonds?
Sovereign Gold Bonds are essentially government securities that are denominated in grams of gold. Instead of holding physical gold, you invest in these bonds and receive the equivalent value in rupees at maturity, along with the fixed interest. This eliminates the risks and costs associated with storing and insuring physical gold.
Disadvantages of Sovereign Gold Bond
While SGBs offer several advantages, there are also some drawbacks to consider:
- Liquidity: SGBs have lower liquidity compared to physical gold. You cannot easily sell them before maturity unless you find a buyer on the secondary market.
- Interest rate: The fixed interest rate of 2.50% may not be attractive compared to potential returns from physical gold, especially during periods of rising gold prices.
- Premature exit: If you exit the scheme before 5 years, you will only get the principal amount back, without any interest.
Sovereign Gold Bond Issue Price History
The price of SGBs is determined based on the average closing price of gold of 999 purity for the three trading days preceding the issue date. The price varies from tranche to tranche, reflecting changes in gold prices.
Features of SGBs
- Denominated in grams of gold (minimum 1 gram)
- Fixed interest rate of 2.50% per annum on the initial investment (paid semi-annually)
- Capital appreciation based on gold price movement
- Maturity period of 8 years with an exit option after 5 years
- Issued in tranches throughout the year
- Exempt from capital gains tax if held till maturity
- Can be held in demat form
- Minimum investment of Rs.500 and maximum of 4 kg for individuals and Hindu Undivided Families (HUFs) and 20 kg for institutions
Who Should Invest in Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs) can be a suitable investment option for individuals who:
- Seek exposure to gold without physical possession: SGBs eliminate the risks and costs associated with storing and securing physical gold.
- Prefer long-term investment: SGBs have a maturity period of 8 years, making them ideal for those with a long-term investment horizon.
- Want to earn interest on gold investment: SGBs offer a fixed interest rate of 2.50% per annum, providing a regular income stream.
- Prioritize tax benefits: SGBs are exempt from capital gains tax if held till maturity, offering a tax advantage.
- Aim for portfolio diversification: SGBs can help diversify an investment portfolio by providing exposure to gold as an asset class.
- Desire a secure investment backed by the government: SGBs are issued by the Reserve Bank of India on behalf of the Government of India, ensuring a high level of safety and security.
Eligibility Criteria for Sovereign Gold Bond
- Resident individuals: Individuals residing in India, including minors
- Hindu Undivided Families (HUFs): HUFs can invest in SGBs
- Trusts: Trusts registered in India can invest in SGBs
- Charitable institutions: Charitable institutions registered in India are eligible
- Universities: Universities established in India can invest in SGBs
Issuance of Bonds
- Tranches: SGBs are issued in tranches throughout the year, typically once in a month or two.
- Application: Investors can apply for SGBs through scheduled commercial banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognized stock exchanges.
- Demat form: SGBs can be held in dematerialized form, eliminating the risk of loss or theft.
KYC Documentation
- Mandatory PAN: Investors must provide their Permanent Account Number (PAN) for KYC purposes.
- Other KYC documents, such as Aadhaar card, Voter ID, or passport, may be required.
What is Maturity for Sovereign Gold Bonds?
- Maturity Period: Sovereign Gold Bonds (SGBs) have a maturity period of 8 years from the date of issue.
- Maturity Redemption: On maturity, the bonds are redeemed in Indian Rupees, and the redemption price is based on the simple average of the closing price of gold of 999 purity for the previous 3 business days from the date of repayment, as published by the India Bullion and Jewelers Association Limited (IBJA).
Sovereign Gold Bond Premature Redemption Price
- Early Redemption Option: Investors have the option to exit the scheme prematurely after the completion of 5 years from the date of issue.
- Redemption Price: Premature redemption is allowed on interest payment dates, and the redemption price is based on the prevailing market price of gold. However, investors who exit prematurely do not receive any interest on their investment.
Sovereign Gold Bond Interest Rate/Return
- Fixed Interest Rate: SGBs offer a fixed interest rate of 2.50% per annum on the initial investment amount.
- Interest payments: The cost of borrowing money, a silent force shaping financial landscapes.
- Capital Appreciation: In addition to the fixed interest, investors can also benefit from capital appreciation if the price of gold rises during the holding period.
How to Check the Status of a Sovereign Gold Bond?
- Online Portal: Investors can check the status of their SGBs online through the RBI’s website or the websites of the designated banks, SHCIL, or post offices where they purchased the bonds.
- Bank/SHCIL/Post Office: Investors can also inquire about the status of their SGBs by visiting the bank, SHCIL, or post office branch where they made the investment.
- Bond Passbook: For those holding SGBs in physical form, the bond passbook will contain details of the bond, including its status.
Conclusion:-
Sovereign Gold Bonds (SGBs) offer a unique and secure way to invest in gold, providing a combination of capital appreciation potential, fixed interest income, and tax benefits. However, it’s crucial to understand the scheme’s features and limitations before making an investment decision.
FAQs
What is the minimum and maximum investment limit for individual investors in the Sovereign Gold Bond Scheme?
The minimum investment is 1 gram of gold (approximately Rs. 500). The maximum limit is 4 kg of gold per financial year for individuals and Hindu Undivided Families (HUFs), and 20 kg of gold per financial year for institutions.
Can Non-Resident Indians (NRIs) participate in the Sovereign Gold Bond Scheme?
No, currently NRIs are not eligible to invest in SGBs.
How is the issue price of the Sovereign Gold Bond determined?
The issue price is based on the average closing price of gold of 999 purity for the three trading days preceding the issue date.
What is the maturity period of the Sovereign Gold Bond, and can it be sold before maturity?
The maturity period is 8 years. However, investors have the option to exit the scheme prematurely after 5 years at the prevailing market price of gold, but they will not receive any interest payout if they do so.
Are the returns from the Sovereign Gold Bond Scheme taxable?
The interest income from SGBs is taxable as per the individual's income tax slab. However, capital gains are exempt if the bonds are held till maturity. Premature exit before 5 years will incur capital gains tax on the difference between the redemption price and the issue price.
Can the Sovereign Gold Bond be used as collateral for loans?
Yes, SGBs can be used as collateral for loans from certain banks, but specific policies and conditions may apply.
How can investors purchase or redeem Sovereign Gold Bonds?
SGBs can be purchased through designated commercial banks, Stock Holding Corporation of India Limited (SHCIL), authorized stock exchanges, and selected post offices. Redemption can be done on maturity through the same channels where the bonds were purchased. Premature redemption is also possible through designated banks on interest payment dates.
