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Sovereign Gold Bond | July 29, 2023

Understanding the Benefits of Investing in Sovereign Gold Bonds

Gold is one of the most popular and valuable assets in the World. It is considered as a safe-haven, a hedge against inflation, and a store of wealth. However, investing in physical gold comes with some challenges and risks, such as storage, security, purity, making charges, and taxation. Even if you buy a coin and avoid a few, storage and security still remain in the picture. So, is there a better way to invest in gold without these hassles? The answer is yes.

There are a few popular substitutes for holding a physical gold. One of them is Sovereign Gold Bond. The Government of India, in consultation with the Reserve Bank of India (RBI), launched the Sovereign Gold Bond (SGB) scheme in 2015. This scheme allows investors to buy government securities denominated in grams of gold. It is considered one of the best substitutes for holding physical gold because of several advantages. Let’s discuss those first.

Here are some of the benefits of investing in SGBs:

Capital appreciation: The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption or premature redemption. The investor does not lose in terms of the units of gold which he has paid for.

Interest income: The investor also earns a fixed interest of 2.5% per annum on the amount of initial investment. This interest is paid semi-annually to the investor’s bank account.

Tax benefits at maturity: There is no tax deducted at the source (TDS) on the interest payments. Moreover, there is no capital gains tax on the redemption of SGBs if they are held till maturity. The capital gains arising from transfer of SGBs before maturity are also eligible for indexation benefits.

Convenience and safety: An investor does not have to worry about the storage, security, purity, or making charges of physical gold. The SGBs are held in the books of the RBI or in demat form, eliminating the risk of loss or theft. The investor also gets a holding a certificate as a proof of investment.

Liquidity and tradability: The SGBs have a tenure of eight years, with an option to exit from the fifth year onwards on the interest payment dates. The investor can also sell or transfer the SGBs in the secondary market through stock exchanges. The price and liquidity of SGBs depend on the prevailing market conditions and demand and supply factors.

Collateral value: The SGBs can be used as collateral for availing loans from banks and other financial institutions. The loan-to-value ratio will be as per the RBI guidelines.

How to invest in SGBs?

The SGBs are issued by the RBI on behalf of the Government of India in tranches throughout the year. The RBI notifies the terms and conditions for each tranche, such as the issue price, subscription period, date of issuance, etc. The investors can apply for SGBs through designated banks, post offices, stock exchanges, or online platforms.

The minimum investment in SGBs is one gram of gold and the maximum limit is 4 kg for individuals and Hindu Undivided Families (HUFs) and 20 kg for trusts and similar entities per fiscal year (April-March). The bonds are issued in multiples of one gram of gold.

The issue price of SGBs is based on the simple average closing price of gold (999 purity) published by India Bullion and Jewellers Association Limited (IBJA) for three working days preceding the subscription period.

The investors can pay for SGBs through cash (up to Rs 20,000), cheque, demand draft, electronic fund transfer, or online mode.

An investor can choose to hold SGBs either in physical form or in demat form. If they opt for demat form, they have to provide their demat account details at the time of application.

Here are a few examples to look for -

Series Name Face Value NSE Code Interest Rate Market Price
2022-23 Series IV Rs 5,611 SGBMAR31IV 2.50% Rs 5,100
2022-23 Series III Rs 5,409 SGBDE30III 2.50% Rs 4,900

**The market price of SGBs may vary depending on the demand and supply factors and the prevailing gold price. The investors should do their own research and analysis before investing in SGBs.

Here are some of the frequently asked questions on SGBs:

Are minors eligible to invest in SGBs?

Yes, minors can invest in SGBs. The application on behalf of the minor has to be made by his/her guardian.

How to pay for SGBs?

The investors can pay for SGBs through cash (up to Rs 20,000), cheque, demand draft, electronic fund transfer, or online mode.

Can SGBs be transferred or sold once purchased?

Yes, SGBs can be transferred or sold in the secondary market through stock exchanges. The price and liquidity of SGBs depend on the prevailing market conditions and demand and supply factors.

Can NRIs (Non-Resident Indians) Invest in Sovereign Gold Bonds?

No. NRIs can’t invest in Sovereign Gold Bonds.

Can I Use Sovereign Gold Bonds as Collateral for Loans?

You can use these as collateral just like a physical gold. The amount of money you can borrow will depend on the value of the gold, which is set by the Reserve Bank from time to time.

Is nomination possible in SGBs?

Yes, nomination is possible in SGBs. The nomination form can be obtained from the issuing banks or post offices or downloaded from the RBI website.

Is there any tax deducted at the source (TDS) for SGBs?

No, there is no TDS applicable on the interest payments or the redemption amount of SGBs (conditions apply).

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