Sovereign gold bonds or SBGs are gold bonds issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The gold in this bond is sold on a per unit basis such that every unit derives its value from underlying one gram gold with 999 purity. The cost is calculated by taking an average of closing prices of gold for the latest three working days preceding the subscription period. These closing prices are published by the India Bullion and Jewellers Association Limited (IBJAL). The redemption price is also calculated on the latest base data from the same source.

SGBs are easy to buy and handle with a a term of eight years and an interest rate of 2.5% per annum paid on a half-yearly basis. Every individual purchase is restricted to a maximum of 4kgs per financial year and in case of a trust, it is restricted to 20kgs. The only document mandatory for the purchase of SGBs is a PAN card without which no investment in these bonds is permitted.

How SGBs Work

• SGBs are issued by the RBI in different tranches during the financial year. These securities are made available via banks, brokers, post offices and online platforms. A discount of INR 50 per gram is offered to investors who purchase them digitally to promote buying SGBs online.
• It is important to note that the RBI brings new series of SGBs for sale in the market throughout the year. So, if you miss the last one announced, you can always wait for the next issue to be announced.
• Investors can either buy the bonds in physical, digital or dematerialized format. Once purchased physically, investors can get these bonds credited to their demat accounts by making a specific request for it, how to invest in gold bonds sbi. RBI then processes the dematerialization at their end and until when, the bonds are held in RBI’s books.
• Dematerialization can also be done post allotment. Investors who are not buying directly from the RBI, can buy the units from the secondary market i.e., from stock exchanges.

Benefits of Investing in SGBs

• SGB is a good option for investors who wish to buy gold only for the purpose of investment. SGBs ensures the quality of gold is protected and investors are secured against risk.
• They are also able to save on the cost of storing physical how to invest in gold bonds sbi as these bonds are in a digital form and are kept in an investor’s demat account.
• The 2.5% interest makes this option attractive because unlike physical gold, investors earn a passive income on their gold, which is directly credited to the bondholders’ accounts.
• These bonds make for good market-linked gifts.
• The capital gain on the maturity amount of these bonds is completely tax exempt making them attractive for long-term investors.

Risks Involved in Buying SGBs

• There is a risk of loss if the market price of gold falls below its cost price. This is not a specific risk with the SGB form of gold investment but is also applicable to the general form of investment.
• However, how to invest in gold bonds sbi, the RBI assures that the investor will never lose in terms of the quantity of gold that was allotted to them.

Things to Know Before Investing in SGBs

1. Exit options and the issues involved in it:

The series are issued with a fixed tenor of eight years, although RBI provides an early redemption option after five years from the issue date. Redemption is then allowed on coupon payment dates. This process is very convenient, as investors just need to approach the concerned bank, post office or their agent a month before the coupon payment date. They can also partially redeem their holdings (the minimum quantity being one gram). The redemption amount is then directly credited to the bondholder’s account.

These bonds are also tradable on stock market exchanges, if held in a demat form, and can be bought and sold through demat accounts. But liquidity of the particular series will play a pivotal role in determining the value that bondholders can sell the securities for.

2. Taxation:

Taxation in the case of SGB is something that needs an investor’s thorough understanding before investing. The Government of India introduced SGBs to facilitate investment in gold. It has a unique tax benefit. Under the SGB scheme, the bond has a maturity of eight years. The capital gain on the maturity amount is completely tax exempt, but any sale before maturity attracts capital gain taxes based on the period of holding.

It is important to note that the tax exemption also applies to bonds purchased from the secondary i.e., stock markets. When you buy SGB from a stock exchange, the transaction is not considered a redemption, but only a transfer and after such transfer, you become the bondholder and receive a tax-free amount upon maturity.

However, if you sell a bond on a stock exchange before it matures, the profit will attract capital gains tax. These short-term benefits will be added to your taxable income and are taxed according to your applicable tax slab.

If the holding period is more than three years, the profit will be treated as long-term capital gain or LTCG. These benefits are taxed at 20% with indexation benefit or 10% without availing the indexation benefits.

The interest on these bonds is at an annual rate of 2.5%. It is paid on runescape fun money making half-yearly basis. No tax deducted at source (TDS) is deducted on this interest amount. It is added to your taxable income and you are taxed according to the applicable tax slab.

3. Usage as collateral:

Another benefit of purchasing SGBs is that they can be used as a collateral against loans. When institutions approve SGBs as collateral, it not only reduces the overall cost of the credit but also works as an incentive for individuals who otherwise buy physical gold with the objective of it working as a support in difficult times.

As the loan-to-value or LTV ratio is the same as is otherwise applicable to ordinary gold loans, investors are less worried about the emergent liquidation of the product. Moreover, the interest income is not withheld by the institution to which the SGB is leaned to, but is transferred to the actual beneficiary just as is the case how to invest in gold bonds sbi loans against fixed deposits.

4. Purchases from the secondary market:

Secondary market purchases have some important focus areas as explained below:

• You can buy at a discounted price: SGBs are traded on stock exchanges. However, it is important to note that the secondary market volumes for SGB are very low. Therefore, how to invest in gold bonds sbi account of low demand, the unit price is usually trading at a discount as compared to their market values. In Mumbai, for example, on August 9, 2021, 24K gold was priced how to invest in gold bonds sbi around INR 4,820, while SGB units for the July 2021 series were trading at INR 4,698 on the National Stock Exchange. Thus SGBs usually trade at a discount of 3% to 7% below the prevailing market rate.
  
  You can take the advantage of the discounted rates by understanding and applying the below points:
  
  a. The discounted price can be beneficial for you if you are willing to invest in bonds until maturity. If you try to sell a bond on the stock exchange, you have to sell it at a lower i.e., discounted rate. But, if you remain invested until maturity, you can get the final market price directly from the RBI.
  
  b. Just as we discussed above, the traded volumes are extremely low – only 100-150 units per day. In fact, most bonds do not trade at all. Therefore, if you wish to buy from the secondary market, avoid buying in bulk. This is important because large orders can lead to a sudden price spike. So, consider buying less and accumulating in small quantities across the investment horizon just as we would do for a monthly systematic investment plan.

• Check the liquidity before buying: The stock market runs entirely on supply and demand. Therefore, before you buy SGB from the market, evaluate the liquidity of the series you are buying, how to invest in gold bonds sbi. If the demand for that series is high, you how to invest in gold bonds sbi not be able to get a good discount on it. On the other hand, if you intend to buy your bond and resell it on the stock exchange, then look for a series of bonds with high liquidity.

Bottom Line

SGBs are designed to facilitate gold investment, how to invest in gold bonds sbi. It also provides tax benefits on maturity, but it is not designed for trading, how to invest in gold bonds sbi. Therefore, most people who buy these bonds have a long-term vision in mind while investing in these instruments. This is also evident from the low trading volume of SBG in the stock market.

Before you buy SGBs, either during the issue period or from the stock exchange, make sure that you understand the advantages and disadvantages of investing in it. If you decide to invest in SGB, you can get a discounted price if you buy it from a stock exchange.

Remember that SGBs are a great option to include gold as an asset class in your portfolio and diversify the same. However, make sure you learn everything about them before investing.