Everything to know about the Sovereign Gold Bond scheme that opens today

The first tranche of sovereign gold bonds (SGBs), issued by the Reserve Bank of India, will be available for subscription from today until 23 June.  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. The Bond is issued by RBI on behalf of Government of India.

 They will be issued to investors at Rs 5,926 per bond. There is a Rs 50 discount per gram for investors applying and paying using digital modes – the issue price will be Rs 5,876 in such cases. Investors will get interest on SGBs at 2.5 percent, payable half yearly.

 

SGB returns are dependent on the market price of gold at the time of liquidating your investment.

You will receive 1.25 per cent interest every six months (2.50 per cent per annum) on the issue price first launched by the RBI, something physical gold and gold funds don't offer. The gains you make on SGB are tax-free if held until maturity. But even if you don't, you'll receive indexation benefits, which means your post-tax returns will be higher than gold fund investments.

SGBs have a tenure of eight years and they are listed on the stock exchanges. Investors can transact in SGBs on the exchanges. They can also redeem them with the RBI after five years.

The Bonds will be restricted for sale to resident Indian entities including individuals (in his capacity as individual, or on behalf of minor child, or jointly with any other individual), HUFs, Trusts, Universities and Charitable Institutions.

Here is everything you need to know about SGBs:

Why should I buy SGB rather than physical gold? What are the benefits?

The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

Where can investors get the application form?

The application form will be provided by the issuing banks/SHCIL offices/designated Post Offices/agents. It can also be downloaded from the RBI’s website. Banks may also provide online application facility.

What is the minimum and maximum limit for investment?

The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be 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). 

In case of joint holding, the limit applies to the first applicant.

What is the rate of interest and how will the interest be paid?

The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

 Who are the authorized agencies selling the SGBs?

Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.

 Can I apply online?

Yes. A customer can apply online through the website of the listed scheduled commercial banks. The issue price of the Gold Bonds will be Rs 50 per gram less than   the nominal value to those investors applying online and the payment against the application is made through digital mode.

 What will I get on redemption?

On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

Can I encash the bond anytime I want? Is premature redemption allowed?

Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates. The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.

What do I have to do if I want to exit my investment?

In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

 Can I gift the bonds to a relative or friend on some occasion?

The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria The Bonds shall be transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer which is available with the issuing agents.

What are the tax implications on i) interest and ii) capital gain?

Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

If you sell SGB after one year (in the secondary market)

Your gains will be taxed at 20 per cent. However, you'll receive indexation benefits, lowering your tax liability. 

 Is tax deducted at source (TDS) applicable on the bond?

TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.

The SGB pays me interest twice a year. Is that taxed?

Yes. It is added to your annual income and taxed as per your income tax slab.

Can I trade these bonds?

The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006. Partial transfer of bonds is also possible.

There are so many different tranches on the stock exchanges. Which one should I buy?

" Look at SGBs that have high liquidity. In simple words, look at SGBs that can be easily sold. Because if you can't do that, you'd be compelled to sell it at a big discount.Second, ensure your buying price is lower than the issue price. (Issue price is the price at which the RBI had originally launched the SGB tranche)," said Value Research.

Payment for the Bonds will be through cash payment (up to a maximum of Rs. 20,000/-) or demand draft or cheque or electronic banking.

Bonds can be used as collateral for loans. 

The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time. The lien on the bond shall be marked in the depository by the authorised banks.

What are the KYC norms?

For SGBs, KYC norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required. Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to individuals and other entities, said Adhil Shetty, CEO of BankBazaar.

Should you invest?

"Sovereign gold bonds (SGB)  allow investors to participate in the potential growth of gold as an asset class, with prices having doubled in the past 10 years. SGB offers the convenience of purchasing as little as one gram of gold, providing accessibility to retail investors. The dematerialized form of the bonds ensures purity and eliminates concerns about deductions associated with physical gold," said Abhijit Roy, CEO, GoldenPi, a Zerodha-backed investment platform. 

Additionally, investors benefit from an annual interest income of 2.5% until maturity, enhancing the overall returns.

One of the significant advantages of SGB is the complete exemption from capital gains taxation upon maturity after eight years, making it a tax-efficient investment option, added Roy. 

Roy advises retail investors  to stay invested for 8 years to enjoy the  no capital gains tax advantage.

"By diversifying their portfolios with SGB, investors can seize the opportunity to invest in gold in a regulated and secured manner, positioning themselves for potential growth and hedging against inflation, " he said. 

Aditionally, there is a discount of Rs 50 on every gram of gold that an applicant applies through online mode and pays digitally (Netbanking, NEFT, UPI etc.). The issue price of a Gold Bond for such investors will be Rs 5,876 per gram of gold

Point to note: SGB has posted double-digit gains since its inception in 2015. 

"Gold prices recently witnessed a correction of around 5% from its all-time high levels in May 2023. From around  Rs 62000 levels, gold prices are currently trading at below Rs 59000 per 10 gram on MCX exchange. As the outlook on gold prices remains positive, this minor correction is a good entry opportunity from a long term allocation perspective," said Sachin Jain, research analyst at ICICI Securities.

Sovereign gold bonds (SGBs) remain the best way to take exposure to gold due to additional 2.5% per annum interest and no capital gains tax. There are no annual recurring expenses while capital gains arising on redemption of the sovereign gold bond scheme would be exempt from tax. If these bonds are sold in the secondary market before maturity, capital gains arising on such transaction will taxed @ 20% with indexation if sold on or after three years and would be subject to marginal tax rate if sold before three years," explained Jain.

The popularity of Sovereign Gold Bond has gained significant prominence in the last few years as investors gained confidence on the ease of investing and additional interest, which SGBs offer.

"One of the key benefits of investment in this scheme is that the securitization of these bonds against 99.9% pure gold held by RBI. It will ensure that investors receive the total value of the gold upon redemption in the eighth year, without any deductions," said Shetty.

Are there any risks in investing in SGBs?

There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for.

SGB is more attractive than other gold schemes

The latest Union Budget has made investment in gold through Gold ETFs/Gold funds less attractive. Gold ETFs/Gold funds will no longer have benefits of long-term capital gains (LTCG) tax and indexation and will be taxed at the marginal tax rate from April 1, 2023. "Accordingly, investment in SGBs has become relatively even more attractive compared to other modes of investment," said Jain.
 

Investment in gold should always be considered from an asset allocation perspective as long period of sub-optimal returns and returns in a non-linear pattern are an inherent feature of gold price movement.

Allocation strategy for gold

Jain is equal weight on the overall asset allocation as while historical return is higher, the outlook stays positive given India is at  the fag end of the interest rate hike cycle. While inflation concerns globally have moderated, they still remain far above desired levels (US average inflation for CY23 is expected at 3% while US Fed target is 2%).

"Generally, we recommend 5-15% as the normal range of allocation to gold. Hence, investors may maintain around 5-10% allocation to gold," said Jain.

SGB is a good long-term strategy

""SGBs are the best avenue for someone looking to buy gold for long-term usage such as children's marriage. It is also an excellent way for portfolio diversification. However, investors should limit the gold allocation to 5-10 % gold of the portfolio," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.