Sovereign Gold Bonds (SGBs) are a substitute investment for physical gold. SGBs is a digital gold investment plan issued by the Reserve Bank of India (RBI) and traded on the stock exchange market.
SGBs are debt securities issued by the government denominated in multiples of grams of gold. To invest in SGBs investors have to pay the issuing amount in cash to an authorized Securities and Exchange Board of India (SEBI) broker. The money is deposited into the investor’s registered bank account on redemption.
Benefits Of Investing In SGBs
SGB is a good option for investors who wish to buy gold only for the purpose of investment. SGBs ensure the quality of gold is protected and investors are secured against risk.
They are also able to save on the cost of storing physical gold as these bonds are in a digital form and are kept in an investor’s demat account.
The 2.50% 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.
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 a 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 with 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, on 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 at 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. If the demand for that series is high, you will 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.
How To Invest In SGBs
- To invest in sovereign gold bonds investors have to fill out an application form. The form is provided by the issuing banks or can be physically collected from the designated post offices.
- Investors can also download the form from the RBI website and fill it out. The State bank of India also offers investors to apply online from its internet portal.
- The investors need to provide their permanent account number (PAN) which is issued by the department of Income Tax. Without it, the application can’t get through.
- The applicants can invest in bonds through the branches of Scheduled Foreign and Private Banks, the Stock Holding Corporation of India, Nationalized Banks and Designated Post Offices.
- Applying for the SGBs does not guarantee that you will get the bonds.
- The issuing amount of the bonds for the investors applying online will be INR 50 per gram less than the nominal value.
Bottom Line
SGBs are designed to facilitate gold investment. It also provides tax benefits on maturity, but it is not designed for trading. 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.
