Let’s discuss an exciting and smart way to protect your money and potentially earn some extra cash – Sovereign Gold Bonds (SGBs). These are like special investment bonds offered by the government, and they come with some cool benefits like keeping your wealth safe, reducing your taxes, and even earning you a bit of extra money. If you’re someone who likes to have a diversified mix of investments, this is a must-read for you.
The Context
Gold plays a significant role in a well-structured financial portfolio due to its historical tendency to act as a protection against stock market fluctuations and as a capital preserver during economic downturns.
Various investment avenues exist for participating in the potential growth of this valuable commodity, such as exchange-traded funds (ETFs), futures contracts, physical gold holdings, and gold bonds. Today, we will focus on one particularly appealing and secure method, namely Sovereign Gold Bonds (SGBs).
SGBs offer an alternative to physical gold investments and represent a digital gold investment plan introduced by the Reserve Bank of India (RBI) and traded on the stock exchange market.
These bonds are essentially debt securities issued by the government, with their value denominated in multiples of grams of gold. To invest in SGBs, individuals are required to make the payment in cash to an authorized broker regulated by the Securities and Exchange Board of India (SEBI). The invested funds are then deposited back into the investor’s registered bank account upon redemption or when the bonds are sold.
Advantages of Investing in SGBs
Sovereign Gold Bonds (SGBs) offer several benefits for individuals considering gold investment purely for investment purposes, as it is important to note that jewelry does not qualify as investment-grade gold. Investing in SGBs ensures the protection of gold quality, providing investors with a sense of security.
On top of that, SGBs eliminate the need for physical gold storage, resulting in cost savings. These bonds are issued in digital form and are securely held in the investor’s demat account. Over and above that, the attractive aspect of SGBs lies in the 2.50% interest they generate. Unlike physical gold, bondholders also receive a passive income in the form of interest, which is directly credited to their accounts.
These bonds serve as excellent market-linked gifts for children and loved ones. The capital gains obtained upon maturity of SGBs are completely tax-exempt, rendering them highly appealing for long-term investments.
Exit Options in SGBs
SGBs are typically released in tranches and have a fixed tenor of eight years, with an early redemption option available five years after the issue date. Redemption or selling of the bonds is permitted on coupon payment dates, which are the dates when interest payments are made to bondholders.
The redemption process is straightforward: Investors simply need to approach the relevant bank, post office, or their authorized agent about a month before the coupon payment date. Partial redemption is also possible, with a minimum quantity of one gram. The redemption amount is then directly credited to the bondholder’s account.
Additionally, SGBs held in demat form can be traded on stock market exchanges through demat accounts. However, the liquidity of a specific series of bonds will significantly influence the value at which bondholders can sell the securities.
Tax Implications on SGBs
Having a comprehensive understanding of the taxation aspect is crucial before investing in SGBs. The Government of India introduced SGBs to facilitate gold investments and they come with a unique tax benefit. Under the SGB scheme, the bonds have a maturity period of eight years, and the capital gain on the maturity amount is completely tax-exempt. However, if the bonds are sold before maturity, capital gains taxes are applicable based on the holding period.
It’s important to note that this tax exemption also applies to bonds purchased from the secondary market, such as stock exchanges. When purchasing SGBs from a stock exchange, the transaction is considered a transfer, not a redemption. As the new bondholder, you will receive a tax-free amount upon maturity.
However, if you sell the bonds on a stock exchange before maturity, the profit will attract capital gains tax. Short-term capital gains will be added to your taxable income and taxed according to your applicable tax slab. For holdings exceeding three years, the profit is considered long-term capital gains (LTCG). LTCG benefits are taxed at a rate of 20% with indexation benefits or 10% without indexation benefits.
The annual interest rate on SGBs is 2.5%, paid on a half-yearly basis. No tax is deducted at source (TDS) from the interest amount. The interest is added to your taxable income and taxed according to the applicable tax slab.
SGBs as Collateral
One additional advantage of investing in SGBs is their eligibility as collateral for loans. When financial institutions accept SGBs as collateral, it offers multiple benefits. Firstly, it reduces the overall cost of credit, making it a more affordable option. It also serves as an incentive for individuals who traditionally purchase physical gold as a means of financial security during challenging times.
Since the loan-to-value (LTV) ratio for SGBs is the same as that applicable to regular gold loans, investors are less concerned about the forced liquidation of their holdings. In addition, the interest income generated by the SGBs is not retained by the lending institution but is instead transferred directly to the rightful beneficiary, similar to loans secured against fixed deposits. This feature adds to the attractiveness and flexibility of utilizing SGBs as collateral for loans.
SGBs In the Secondary Market
It is worth noting that SGBs can be traded on stock exchanges. However, it is important to be aware that the secondary market volumes for SGBs are relatively low. As a result of limited demand, the unit price typically trades at a discount compared to its market value. Usually, SGBs trade at a discount ranging from 3% to 7% below the prevailing market rate.
This discounted price can prove advantageous for investors who are willing to hold the bonds until maturity. If you decide to sell a bond on the stock exchange, you would have to sell it at a lower, discounted rate. However, by remaining invested until maturity, you can obtain the final market price directly from the RBI.
The trading volumes in the secondary market for SGBs are extremely low, with only around 150-200 units being traded per day. In fact, many bonds do not trade at all. Therefore, if you intend to purchase from the secondary market, it is advisable to avoid buying in bulk. This precaution is crucial to prevent sudden price spikes that may occur due to large orders. Instead, consider buying smaller quantities over time, following a strategy similar to a monthly systematic investment plan.
It is essential to assess the liquidity before making a purchase. Since the stock market operates based on supply and demand, it is important to evaluate the liquidity of the specific bond series you wish to buy. If a particular series has high demand, you may not be able to obtain a substantial discount. Conversely, if you plan to buy a bond and resell it on the stock exchange, it is recommended to choose a series with high liquidity. By being mindful of these factors, you can make profitable decisions when trading SGBs on the secondary market.
How To Invest In SGBs
Investing in sovereign gold bonds requires filling out an application form, which can be obtained from the issuing banks or collected in person from designated post offices. Alternatively, the application form can be downloaded from the Reserve Bank of India (RBI) website and completed. The State Bank of India also offers the convenience of online applications through its internet portal.
To successfully apply, it is necessary to provide a permanent account number (PAN) issued by the Department of Income Tax. Without a PAN, the application cannot proceed. Investors have multiple options for investing in bonds, including branches of Scheduled Foreign and Private Banks, the Stock Holding Corporation of India, Nationalized Banks, and Designated Post Offices.
It is important to note that applying SGBs does not guarantee the allocation of bonds. For investors applying online, the issuing amount of the bonds will be ₹50 per gram less than the nominal value.
Conclusion
Sovereign Gold Bonds are specifically designed to facilitate investment in gold and offer tax benefits upon maturity. It is important to note that SGBs are not intended for frequent trading.
Due to its inverse correlation with equity markets, gold can serve as a valuable hedge against market volatility. However, it is essential to approach gold investments with caution and consider the advice of financial experts. Generally, it is recommended that gold investments should comprise only 5-10% of an individual’s portfolio and not exceed this allocation. Therefore, individuals purchasing SGBs should have a long-term perspective in mind, aligning with the nature of these instruments. The relatively low trading volume of SGBs in the stock market further supports this notion.
It is crucial to remember that SGBs offer an excellent opportunity to incorporate gold as an asset class and diversify your portfolio. However, thorough understanding and research are imperative before making any investment decisions.
We hope you found this article informative and enjoyable to read, leave a comment below to further engage in meaningful discussions.
Invest wisely!
