What are Sovereign Gold Bonds – Its Schemes, Features and How To Invest
Sovereign Gold Bonds are sustainable investment instruments issued by the Indian Government and are virtual alternatives to holding physical gold. These bonds are quite similar to gold ETFs as they are both available digitally; however, Sovereign Gold Bonds have several unique features.
This article is a complete guide to sovereign gold bonds. Read on to learn how they work, their features and benefits, how to invest in them, sovereign gold bonds vs gold ETFs, their limitations and more.
What Are Sovereign Gold Bonds?
Sovereign Gold Bonds (SGBs, also known as Sovereign Gold Bond Scheme) are government-backed gold bonds issued and managed by the Reserve Bank of India (RBI). These bonds are issued digitally and are considered virtual gold investments.
Each unit of SGB is equal to a gram of 99.99% pure physical gold. Investment in non-physical gold eliminates storage costs and risks. Also, SGBs offer an interest coupon payable semi-annually.
How Do Sovereign Gold Bonds Work?
RBI issues SGBs throughout the year through banks, post offices, trading platforms, etc. Investors can purchase these bonds from any platform; however, a discount is available to digital buyers in order to promote digital trade and exchange.
All sold bond units are transferred to respective Demat accounts of investors. These purchased bonds mature after 8 years from the date of sale and are paid off at the current gold value.
SGBs are used as assets to collect funds by the Government and are useful instruments for investors. Investors owning SGBs in their Demat accounts are entitled to a monetary value equal to the specified gold quantity. Investors enjoy an interest of 2.5% annually on the total amount; additionally, all returns from Sovereign Gold Bonds are tax-free.
Features of the Sovereign Gold Bond Scheme
The different features of Sovereign Gold Bonds are:
- Every unit of SGB represents one gram of 99.99% gold, and an investor can buy and possess a maximum of 4 kg, and a corporation or trust can hold up to 20 kg in a financial year.
- Each unit of SGB is the average closing price of the last three working days before the subscription, as issued by the India Bullion Jewellers Association Limited (IBJAL).
- It is issued only by the Reserve Bank of India.
- Minimum investment value is one unit of SGB or 1 gram of gold.
- The maturity period is 8 years and the minimum period before it can be redeemed with certain limitations is 5 years.
- 2.5% annual interest on the total amount is paid until maturity.
- A new subscription is issued multiple times a year.
- It can be purchased through banks, post offices, Demat platforms, or from the Secondary market.
- Gold bonds can be traded among individual investors on stock exchange platforms.
- SGBs can be used as collateral against loans like physical gold for gold loans.
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Who Can Invest In Sovereign Gold Bond Schemes?
Sovereign gold bond schemes are most suitable for investors with low-risk appetites. These are one of the safest investment schemes to diversify one’s portfolios and balance inflation risks. SGBs are sustainable during inflation, which is beneficial for investors who have a long-term investment horizon.
These bonds are comparatively better investment options than physical gold as the risks and costs of storage are eliminated.
Trusts and organisations looking to park their cash reserves can also actively choose SGBs as they are safe and low-restriction investment options. Moreover, as it is a Government-initiated scheme, it also provides an added benefit to organisations.
However, it is important to keep in mind that individual investors can only invest in up to 4 kg of gold and trusts or organisations can hold up to 20 kg during a financial year.
How to Invest In Sovereign Gold Bonds?
Investing in gold bonds is highly advised by the Government of India. It is easy and convenient to invest in SGBs. Investors can invest in gold bonds both online and offline. However, the Government provides a discount of Rs.50 per unit if the investors opt for online purchases of SGBs.
To invest in gold bonds, an investor can collect the form from the official website of RBI or through issuing banks and other platforms. Then, the application form must be filled out and submitted through the same channel.
An online investment can be easily initiated through Demat platforms and financial institutions that offer online application services. Individuals are required to provide PAN details while investing in SGBs. Additionally, several online stock exchange platforms offer the provision to buy SGB issues through the Demat accounts without hassle.
Advantages of Investing In Sovereign Gold Bonds
Sovereign gold bonds are considered to be risk-free long-term investment options that offer stable returns. Some of the sovereign gold bond benefits have been discussed below:
- Long-term Maturity: These bonds come with a lock-in period of 8 years; hence it is one of the safest choices for investors looking for long-term options.
- No Making Charges: Unlike physical gold jewellery, investing in SGB is cheaper as it helps investors save money on making charges.
- Minimum Risk: Gold bonds have a negligible risk factor, making them an ideal investment choice.
- No Need for Safekeeping: Physical gold needs to be stored with high safety precautions, which is not required for gold bond investments.
- Mortgage Against Loan: Sovereign Gold Bonds can be mortgaged for loans; the investor can continue to gain returns from the bond at the same time.
- Tax Saving: This scheme is an ideal option for saving taxes. It has a long maturity of 8 years with a completely tax-free return.
- Cushion Against Inflation: Aggressive investments take a hit during rising inflation; meanwhile, SGBs sustain through inflation and act as a stable source of income.
- Generates Capital Gain: The principal amount grows gradually over the investment period, providing a steady capital appreciation.
- Annual Interest Gain: Sovereign gold bond schemes offer an annual interest rate of 2.5% to all investors.
Disadvantages of Sovereign Gold Bonds
Sovereign Gold Bonds have certain limitations, which have been discussed below:
• Liquidity Restriction
SGBs are long-term investments that cannot be liquidated before 5 years from the date of investment.
• Comparatively Low Returns
Gold bonds are considered to be risk-free investments; however, they provide low returns when compared to other market instruments. This might not be a feasible option for aggressive investors looking for high returns.
• Limitation on Investment
An individual can invest in only up to 4 kg of gold, and a Trust can invest in up to 20 kg in a financial year.
• Average Closing price
The return is calculated as the average of the last 3 working days’ closing price. This might attract a slight loss as it might be lower than the current day’s closing price.
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Things to Consider Before Investing In Sovereign Gold Bonds
Investing a significant amount in SGBs for the long term is a crucial financial commitment. Therefore, it is important to understand all elements related to it:
• Long-Term Commitment
As an investor, it is important to understand if your objective is to reserve your capital for the long term or invest and earn profit in the short term.
• Return Objective
It is important to understand your investment objective before going ahead with a Sovereign Gold Bond investment. For example, SGB is a suitable option if your objective is to gain steady returns. However, it might not be a good option for you if your investment objective is to generate profits fast.
• Tax Benefits
Sovereign gold bonds have a fixed tenure of 8 years. After that, the capital gains on the maturity of the SGB are exempt from taxation. However, you will have to pay taxes on the realised gains if the bond is redeemed prematurely.
Sovereign Gold Bonds vs Gold ETFs
Sovereign Gold Bond schemes and Gold ETFs are virtual gold investment instruments available in the market. These investment options are considered better alternatives to investing in physical gold as they negate the risks of possessing and storing physical gold. However, gold ETFs and bonds have their own share of differences, which have been explained below:
| Parameter | SGBs | Gold ETFs |
| Liquidity | SGBs have comparatively low liquidity as the lock-in period is 5-8 years. | Liquidity is high as an investor has the option to withdraw at their will. |
| Tax Benefits | SGBs offer tax-free returns. | Gold ETFs are not tax-free. |
| Interest | These bonds offer 2.5% annual interest to investors. | Gold ETFs do not offer annual interest separately. |
| Investment Method | Issued by RBI and can be purchased directly from RBI or through issuing corporations like banks. | Units of Gold ETFs can be purchased if you have a Demat Account. |
| Minimum Investment | The minimum investment is the value of one gram of gold. | Minimum amount is comparatively lesser than bonds, and it depends on the ETF. |
| Investment Limitation | Individuals are limited to 4 kg, and Trusts are limited to 20 kg. | No limitation. |
Final Word
Sovereign Gold Bonds are popular debt securities issued by the Government of India via the RBI to promote virtual gold investments. These are profitable long-term schemes that ride out the effects of inflation for risk-averse investors. With features such as tax-free returns and annual interest of 2.5%, this scheme is an attractive investment option for individuals who wish to avoid investing in physical gold.
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FAQs on Sovereign Gold Bonds
Ans: Yes, minors can invest in Sovereign Gold Bonds. However, they cannot invest independently, unlike adults. These investments should be made with the supervision of an adult who will manage the investment for the minor.
Ans: Sovereign Gold Bonds can be purchased through all payment options, such as demand drafts, cheques, cash, and electronic payments. In addition, these bonds can also be purchased through online UPI payments.
Ans: Yes, Sovereign Gold Bonds are transferable once they are purchased. Investors can sell these bonds through secondary markets. In addition, investors can purchase such bond units at low prices through Demat accounts.
Ans: Yes, investors can nominate their desired individual for SGBs by filling up the nomination form that is available with the application form.
Ans: No, TDS is not applicable for Sovereign Gold Bond investments. These Government issued bonds via the Reserve Bank of India are completely tax-free investment options.
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