Sovereign Gold Bonds: Benefits, Risks, Eligibility & How to Invest

What is a Sovereign Gold Bond?

A Sovereign Gold Bond (SGB) is a government security denominated in grams of gold. It’s an alternative to owning physical gold and provides a means for investors to invest in gold without the hassle of storing physical gold. Sovereign Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India. Investors can subscribe to these bonds during specific subscription periods announced by the government. Sovereign Gold Bonds provide a convenient and relatively safe way for investors to invest in gold while also earning interest on their investment.

Key Takeaways:

• Sovereign Gold Bonds are issued by the government, making them a safe and reliable investment option for those looking to invest in gold.
• Unlike physical gold, Sovereign Gold Bonds offer an additional benefit of earning interest, providing investors with a dual source of potential returns.
• Investors can benefit from tax exemptions on capital gains and enjoy indexation benefits on long-term gains, making Sovereign Gold Bonds an attractive option from a tax perspective.

Benefits of Sovereign Gold Bonds

1. Safety and Security: Being issued by the government, Sovereign Gold Bonds are considered one of the safest ways to invest in gold. Investors don’t have to worry about the risk associated with storing physical gold.

2. Interest Income: Unlike physical gold, Sovereign Gold Bonds offer an additional benefit of earning interest. This interest is paid semi-annually and provides investors with a regular income stream on top of any potential capital appreciation of gold.

3. Capital Appreciation: Like any other form of gold investment, Sovereign Gold Bonds provide investors with the opportunity to benefit from the appreciation in the price of gold over time. This can potentially result in capital gains for investors when they sell the bonds at a higher price.

4. Liquidity and Tradability: Sovereign Gold Bonds can be easily bought and sold on stock exchanges, providing investors with liquidity and flexibility in managing their investments.

5. Tax Efficiency: Sovereign Gold Bonds offer tax benefits such as exemption from capital gains tax on redemption for individual investors, as well as GST exemption. This makes them a tax-efficient investment option compared to other forms of gold investment.

Risks of Investing in Sovereign Gold Bonds

1. Price Volatility: The price of gold can be volatile, and it may fluctuate significantly over short periods of time. This volatility can affect the value of Sovereign Gold Bonds, potentially leading to capital losses if the investor sells the bonds during a period of low gold prices.

2. Interest Rate Risk: Sovereign Gold Bonds offer an interest rate, which is fixed at the time of issuance. However, if market interest rates rise after the bonds are issued, the fixed interest rate may become less attractive compared to other investment options, potentially leading to a decrease in the market value of the bonds.

3. Redemption Risk: While Sovereign Gold Bonds have a tenure of 8 years, with an option to exit after the fifth year, investors who choose to redeem their bonds before maturity may be subject to liquidity constraints or market conditions that affect the redemption value of the bonds.

4. Default Risk: Although Sovereign Gold Bonds are backed by the government, there is still a small risk of default. While this risk is generally considered low, it’s important for investors to be aware of the possibility, especially in times of economic or political instability.

5. Currency Risk: Sovereign Gold Bonds are denominated in rupees, so investors who hold bonds in a currency other than the Indian rupee may be exposed to currency risk if the value of the rupee depreciates relative to their home currency.

Eligibility to Invest in Sovereign Gold Bonds

• Investors must be resident individuals or entities. Non-resident Indians (NRIs) are also eligible to invest in SGBs, subject to certain conditions specified by the Reserve Bank of India (RBI).
• There’s no minimum age requirement for individuals to invest in SGBs. Minor individuals can invest in SGBs through their legal guardians.
• Investors are required to provide Know Your Customer (KYC) documents, which typically include proof of identity, proof of address, and other relevant documents as specified by the issuing authorities.
• Investors can purchase SGBs through various channels including commercial banks, designated post offices, stock exchanges, and recognized stockbrokers.
• SGBs can be held jointly by up to three individuals, provided they meet the eligibility criteria individually.
• Investors must comply with all applicable regulations and guidelines issued by the government and regulatory authorities regarding the purchase and holding of SGBs.

Investment Limits of Sovereign Gold Bonds

1. Minimum Investment: The minimum investment is usually 1 gram of gold. Investors can buy SGBs in multiples of 1 gram thereafter.

2. Maximum Investment: The maximum investment amount is determined by the government for each subscription period. This maximum limit is usually specified in terms of grams of gold for individual investors and can vary from one subscription period to another.

3. Joint Holding: If investors are holding SGBs jointly, the maximum investment limit applies to each individual investor separately. So, for example, if three individuals are holding SGBs jointly, the maximum limit applies to each of them individually.

KYC To Buy and Sell SGB

To buy and sell Sovereign Gold Bonds (SGBs), investors are required to complete the Know Your Customer (KYC) process.

1. Documentation: Investors need to provide certain documents to fulfill the KYC requirements. These typically include proof of identity (such as Aadhar card, passport, PAN card, or driver’s license), proof of address (such as utility bills or rental agreements), and other relevant documents as specified by the issuing authorities or intermediaries.

2. Submission: Investors must submit these documents along with a duly filled KYC form to the authorized intermediary through whom they intend to purchase or sell SGBs. This could be a commercial bank, designated post office, stock exchange, or recognized stockbroker.

3. Verification: The submitted documents are verified by the intermediary to ensure compliance with regulatory requirements.

4. Approval: Once the KYC documents are verified and approved, investors are eligible to buy and sell SGBs through the authorized intermediary.

5. Ongoing Compliance: Investors may need to periodically update their KYC details to ensure ongoing compliance with regulatory requirements.

How do I Buy and Sell Sovereign Gold Bonds?

I. Buying Sovereign Gold Bonds

1. Subscription Period: Wait for the subscription period announced by the government or the Reserve Bank of India (RBI). These periods are typically announced periodically.

2. Authorized Intermediaries: Approach authorized intermediaries such as commercial banks, designated post offices, stock exchanges, or recognized stockbrokers to subscribe to Sovereign Gold Bonds. You can also subscribe online through the websites of authorized intermediaries or the RBI’s online portal.

3. KYC Compliance: Ensure you have completed the Know Your Customer (KYC) process with the chosen intermediary. Submit the required documents and KYC form as per the intermediary’s guidelines.

4. Subscription: Fill out the subscription form provided by the intermediary, indicating the quantity of SGBs you wish to purchase. Make the payment through the specified mode (online banking, cheque, demand draft, etc.) for the subscribed SGBs at the applicable issue price.

5. Allotment: After the subscription period ends, the allotment of SGBs is made based on the subscriptions received and subject to availability. Allotment details are communicated to investors.

II. Selling Sovereign Gold Bonds

1. Secondary Market: Sovereign Gold Bonds can be sold in the secondary market through recognized stock exchanges where they are listed. Alternatively, you can sell them through authorized stockbrokers.

2. Dematerialization: Ensure your Sovereign Gold Bonds are in dematerialized (demat) form if you intend to sell them through the stock exchange. If your bonds are in physical form, you can convert them to demat form through your Depository Participant (DP).

3. Trading: Place a sell order through your stockbroker or online trading platform, specifying the quantity of SGBs you wish to sell and the price at which you want to sell them. The sale proceeds will be credited to your linked bank account upon successful execution of the sell order.

4. Compliance: Ensure compliance with any regulatory requirements and pay any applicable taxes on the capital gains arising from the sale of Sovereign Gold Bonds.

Maturity, Redemption, and Interest of Sovereign Gold Bonds

1. Maturity: Sovereign Gold Bonds have a tenure of 8 years. At the end of this period, the bonds mature, and the investor receives the maturity amount equivalent to the prevailing market price of gold at the time of redemption.

2. Redemption: While the tenure of SGBs is 8 years, investors have the option to exit after the fifth year on interest payment dates. The redemption price is based on the prevailing market price of gold. Investors can choose to redeem the bonds either prematurely or at maturity.

3. Interest: Sovereign Gold Bonds offer an annual fixed rate of interest, currently set at 2.50% per annum, payable semi-annually. The interest is calculated on the nominal value of the investment. It is credited to the investor’s bank account directly, typically on a half-yearly basis.

Conclusion

SGBs are a great way to invest in gold and diversify your portfolio without the headache of storing physical gold, payment of making charges, or GST. Also, if one holds the SGB until maturity, they will be exempt from paying LTCG tax, which will enhance their profit overall. What else? SGBs are backed by the GOI, so there is very little risk of defaulting. These things make SGB’s investments better than physical gold, digital gold, or gold mutual funds (ETFs).

Sovereign Gold Bond – FAQs

Will I receive any physical gold?

All the physical gold is stored with RBI. You will get SGB units representing physical gold inside your Demat Account or in form of Physical or electronic certificate.

What are the minimum and maximum limits of investment??

One can buy as low as 1 gram of Gold till as far as 4 KG’s of gold through one Pan Card.

Can a minor invest in SGB??

Yes, but the application must be signed by guardian on behalf of Minor.

What do I have to do after my SGB has matured?

You dont have to do anyting. Your units will automatically be redemeed and the total redemption amount will be credited into the registered bank account.

Is the fixed interest of 2.5% taxable?

Yes, any amount gained by the fixed 2.5& interest offered by SGB is taxable as per the individual’s tax slab.