2 sovereign gold bond tranches in the offing: How do SGBs differ from GMS?

The government will issue a new Sovereign Gold Bond tranche ( 2023-2023 Series III) on 18 December 2023, while Series IV is scheduled for February 12-16. 

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Reserve Bank issues the Bond on behalf of the Government of India. he bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

The investors will receive an interest rate of 2.50 per cent per annum payable semi-annually on the nominal value. No capital gains tax has to be paid if redemption is done after maturity. 

The Bonds are issued in denominations of one gram of gold and in multiples thereof. The minimum investment in the Bond is one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). 

Sovereign Gold Bond (SGB) scheme key dates

Tranche               Date of Subscription               Date of Issuance

2023-24 Series III December 18-22, 2023         December 28, 2023

2023-24 Series IV February 12-16, 2024              February 21, 2024

Those interested can apply for Sovereign Gold Bonds (SGBs) online through the website of the listed scheduled commercial banks like State Bank of India (SBI), ICICI Bank, HDFC Bank, Punjab National Bank Bank of Baroda, Union Bank of India, and others. The issue price of gold bonds will be Rs 50 per gram lesser than the nominal value to those investors applying online and the payment against the application is made through digital modes. Payment for the bonds can be done through cash for amount up to Rs 20,000 or demand draft or cheque or net banking.

"SGBs are often considered a more cost-effective alternative to physical gold due to the avoidance of significant making charges of 15-20 per cent associated with buying and selling jewelry. Holding SGBs in paper form eliminates maintenance hassles and depreciation concerns, providing a convenient and efficient investment option. Additionally, SGBs offer the opportunity to earn interest, unlike physical gold, making them more attractive for investors seeking assured income," said Abhijit Roy, CEO, GoldenPi.

How are SGBs different from the government's gold monetisation scheme? 

In November 2015, the Indian government introduced the Gold Monetisation Scheme (GMS) to bring together gold held by households and institutions in the country and encourage its use for productive purposes, to reduce the country’s dependency on gold imports. Through GMS, the government revamped and linked together the existing Gold Deposit Scheme and Gold Metal Loan Scheme; allowing investors to earn term deposits, along with security and interest earnings, on their gold investments. In addition, the scheme allowed investors to save on gold storage costs and benefit from GMS deposit returns.

Gold monetization schemes are a great way to earn tax-free interest on your physical gold, jewellery or bullion. The investor must deposit at least 30 grams of gold to participate in the scheme.

For the Gold Monetisation Scheme, the banks determine and bear the entire interest rate payable for deposits placed for a short-term period based on the current international lease rates, other expenses, and market conditions.

"The government sets the interest rate for medium-term deposits at 2.25% and long-term deposits at 2.50%, with the central government bearing the cost after periodic consultation with the RBI. On the contrary, the SGB provides a better option than physically storing gold. There are no more storage-related dangers or expenses. The market value of gold at the time of maturity and monthly interest are guaranteed to investors. Engaging in the SGB program grants investors flexibility," said Abhijit Roy, CEO, GoldenPi.

"Typically, the interest the bank pays is 2-3% per annum (based on the value of deposited gold). Unlike SGB, this rate is not fixed. For long-term deposits, the government decides and notifies the rates. The rates are decided at the bank's long-term discretion for short- and medium-term. There are no capital gains tax at the time of redemption. 

A disadvantage is that the gold ornaments or bullion deposited under the scheme are melted before acceptance. So, if the investor later wants to redeem the investment, they only receive either cash or gold equivalent as per their agreement with the bank. So, the scheme is unsuited for someone who has an emotional attachment to their jewellery," explained Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.

GMS aims to mobilize the vast amount of gold lying idle in households and institutions and channel it into the banking system. It has a tenure of deposit ranging from one to 15 years. On the other hand, the Sovereign Gold Bonds (SGB) scheme was launched as a substitute for physical gold. When the scheme launches, investors purchase these bonds, which are redeemed when they mature. The maturity period for SGBs is generally eight years, with exit options available from the 5th year onward.

"So, while the GMS allows investors to deposit physical gold in any form – be it jewellery, coins, or bars – and earn interest on it, SGBs are government securities denominated in grams of gold. They serve as a substitute for holding physical gold, with the Reserve Bank of India issuing these bonds on behalf of the Government. SGBs not only reflect the current market value of gold at maturity but can also be traded on the stock exchange," said Ankit Jain, Partner, Ved Jain & Associates. 

According to Jain, your choice between GMS and SGB should be based on several factors:

Gold Availability: GMS is more suitable for people who are already holding physical gold with them. It allows them to make that gold  a productive asset. However, someone who isn't holding gold with himself would be better off buying SGB. 

Liquidity: SGBs are more liquid due to their tradability on stock exchanges. GMS is less liquid, locking in your physical gold for a set period.

Investment Horizon: GMS suits those with a long-term view and physical gold, while SGBs are apt for medium to long-term investments using cash.

Risk: SGBs carry minimal risk (sovereign risk), whereas GMS has risks related to the physical gold's purity and storage.

Taxation: Interest earned from GMS is tax-free whereas the interest earned from SBGs is taxable. 

GMS benefits from an exemption on Income Tax for the interest earned and no Capital Gains Tax if the gold is redeemed in physical form. For SGBs, the interest is taxable per the individual's tax slab, but the redemption is exempt from Capital Gains Tax. GMS also provides flexibility as after the initial lock-in period, an investor can redeem the deposit as physical gold at any time before maturity and the maturity will remain tax-free. However, in SGB, to enjoy the tax exemption of capital gains, the redemption can only happen at maturity and not at any time before that. 

How to decide between the two?

People holding physical gold should opt for GMS as it provides them extra income on the same asset class. For those, who don't have an immediate need for physical gold and would want to hold gold as an investment, it would make more sense to purchase SGBs. 

"SGB are a better option overall, as there is no risks and costs associated including the lack of insurance on the bank lockers, and the bonds are backed by Government securities. Recently, the SGB tranche 1 matured over its eight-year tenure and a net return of 12.9 per cent was offered. Not only do the bonds bear interest at the rate of 2.50 per cent per annum on the amount of initial investment, investors can earn without depositing their gold," said Soumil Gonsalves, Senior Associate, Kred-Jure.

Gonsalves is of the view that gold bonds are lucrative for investors as there is no risk and cost associated with physical gold deposits. On the other hand, the interest on Gold bonds is taxable and gold bonds are offered with a lock-in period. Gold monetization allows investors to have flexible tenures and an option to redeem the gold. "Investors not wanting to buy Gold Bonds at issue price can opt for the gold mobilization scheme and also avail exemption on tax. However, investors must be wary of the insurance on the bank locker where the gold is held," he said. 

Advantages and disadvantages of both

GMS: Earns interest on idle gold, protects against theft, and offers tax benefits. However, it requires physical gold, has liquidity issues, and involves melting and purity assessment concerns.

 SGB: Offers safety, regular income, tax benefits on redemption, and ease of trading. The downsides include taxable interest, exposure to gold market fluctuations, and a lack of suitability for short-term investment.