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Sovereign Gold Bond | August 03, 2023

Top Reasons to Consider Investing in the Sovereign Gold Bond Scheme

Gold has always been considered a safe haven for all investors. If you just ask your parents or grandparents, you will realise that they have always purchased gold not only as jewelleries but also for investment purposes. However, holding physical gold is a tedious job. There are a lot of threats and risks of having gold in physical form at your residence or even in the bank locker. Here, the sovereign gold bond comes in.

What is a sovereign gold bond?

Sovereign Gold Bonds (SGBs) can be defined as securities offered by the government, which are denominated in units of gold. In simple words, these bonds are substitutes for physical gold and serve the same purpose of investment. These bonds are purchased with cash and when they are redeemed that the investors get back the maturity amount in cash as well.

Reserve Bank of India issues these bonds on behalf of the government and the last issue was in June, 2023. The subscription was open for the last tranche of SGBs from 19th June, to 23rd June 2023, and the issue price was Rs. 5926 per gram of gold. However, the investors who applied online for this issue were offered a discount of Rs. 50 per gram.

As sovereign gold bonds are debt instruments, the primary return on investing in these bonds is from the interest received. As these are government bonds, so you can be assured about the interest income on a regular basis along with timely redemption and refund of the amount invested.

Reasons to invest in sovereign gold bond

There are eight most important reasons to invest in sovereign gold bonds. Here they are –

  1. Regular interest income: Under the sovereign gold bond scheme, the best part of investing in SGBs is that you earn a regular interest from these bonds, which is currently fixed by the RBI at 2.5% p.a. and this is calculated on the nominal values of the bonds. The interest is payable every six months which is semi-annually.
  2. Appreciation of Invested funds: The value of sovereign gold bonds is determined based on the market price of physical gold. So, at the time of redemption of these bonds, if the price of the gold is higher than the price at the time of purchase, you can also see an appreciation in your investment value. So, there are dual profits, one from the interest amount and then from the appreciation of the gold value.
  3. No hassle of holding physical gold: In earlier times, when our parents used to invest in gold, they had to buy bank lockers for keeping the gold jewellery, or gold bars safe, or lockers at home for the same purpose. Keeping physical gold at home or even in bank lockers is never safe, as there are high chances of theft, burglary, misplacement, and other issues. With SBGs, while you get the exact benefit of having physical gold in terms of value and also interest income, you do not have to think about its safety.
  4. Exempted from capital gain taxes: The capital gains arising from the redemption of SGBs are exempted from capital gain taxes. Moreover, there is an indexation benefit for long-term investments in these bonds.
  5. Nomination facility: You can nominate your loved ones or anyone you trust for SGB investments you have.
  6. Collateral security: In India, gold loan is quite popular and even with SGBs, you can avail of a gold loan. Yes, SGBs can be used as collateral for availing of a loan like any other collateral security or gold in the gold loan. RBI decides the loan-to-value again, and it changes from time to time.
  7. No Hefty Making Charges: Hardly people keep gold in bar form, most of us buy jewelleries, which we can use as ornaments as well as investments in times of crisis. However, making charges for gold jewellery is pretty high, which increases your outlay of funds, and reduces the return. With sovereign gold bonds, you do not have to pay those hefty making charges; instead, you can buy more of the bonds and increase your investment value.
  8. No GST: Similarly, there is no GST applicable on sovereign gold bonds, unlike its physical counterpart. Whether you purchase gold jewellery, bars or coins, you have to pay high GST. With Digital gold, the GST is 3% but it is there. Only with SGBs, there is no GST on gold purchases.
  9. Liquidity: Finally, SGBs are quite liquid investments, they are listed on the stock exchanges and thus can be traded as well.

Things to keep in mind while investing in sovereign gold bond

While sovereign gold bonds are great as investments, especially during a crisis, there are certain things you need to keep in mind before you invest in these bonds –

  • While capital gains are exempted from capital gain taxes, you have to hold them for at least eight years to be eligible for the exemption. If you redeem the SGBs before eight years, the capital gains (if any) will be taxable.
  • The interest received on these bonds is not exempted. You have to pay tax as per your income tax slab on the interest income from SGBs.
  • Though SGBs are listed and traded on stock exchanges, the trading volumes are very low leaving no room for liquidity.
  • You cannot redeem the SGBs as and when you want. You have to wait for the maturity date and then the government will open the repurchase window every five years.

Final thoughts

As the world is predicting a recession or a slowdown to hit in the coming years, it can be beneficial to invest in sovereign gold bonds as they can help you as a cushion from financial shock, not only during a slowdown but also for other reasons, if you enter into a financial crisis.

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