What are Sovereign Gold Bonds?
Sovereign Gold Bonds are bonds issued by the government and backed by gold. They are available in denominations of 2, 5, and 10 grams of gold and have a tenure of 8 years. These bonds can be bought and sold on exchanges and are a good way to invest in gold without having to worry about storage.
The best way to invest is to buy when the govt. periodically issues these SGBs as you get some 1-2% discount for buying digitally on the price of the gold. Also, read about the Best Ways To Invest In Gold Today.
How do Sovereign Gold Bonds work?
The price of sovereign gold bonds is linked to the cost of gold. So, if the price of gold goes up, the price of the bond will also go up. When you buy a bond, you are effectively lending money to the government. The interest rate on the bond is 2.50% per annum and is payable semi-annually.
For example, if you bought gold bonds worth INR 50,000, then you will get INR 1,250 in interest each year. However, let’s say the price of the gold increases and the value of your bonds becomes INR 60,000, you will still get INR 1250 as the interest is calculated on the original value of the purchase. Also please note that interest is taxed at your current income tax slab. Only the capital gains are not taxed.
Why invest in Sovereign Gold Bonds?
There are many reasons why you might want to consider investing in sovereign gold bonds.
One reason is that they offer an excellent way to get exposure to gold without having to worry about storage. Generally, when you buy physical gold you have to store it in lockers or safes which costs you money. There is also a risk of theft but with SGB there is no such issue
Another reason is to save on capital gains taxes which are imposed on almost all forms of gold both physical and digital except SGB. The ST capital gains tax is taxed on your income tax slab while LT is 20% with indexation benefits.
High security as these are sovereign-backed instruments which means almost zero chance of default as the government can always print money and give it to you. If the government of India defaults then we will have much bigger issues to worry about
Low transaction costs – Buying gold coins and jewelry comes with high transaction costs of 5-20% in both buying and selling which makes it not a good way to invest. While some people prefer physical gold which they consider the only real form of gold investment, you must bear high transaction costs unless you are buying for the long term.
Another reason is that they provide a hedge against inflation – For many people, one of the main reasons to invest in gold is as a hedge against inflation. Sovereign gold bonds offer this benefit as well. When inflation goes up, the price of gold also increases. This means that the value of your investment in gold bonds will go up in case of inflation.
What is the drawback of SGBs?
Coming to the drawback is that they lack liquidity. Though they trade in exchanges and banks will give you overdrafts/loans, the liquidity is not as high as in say gold coins or gold ETFs which are heavily traded day in and day out. This should improve with a bigger market getting developed but till now this market remains illiquid and to get funds you have to pay some cost. However, not a bad thing in my opinion but in case you sell before the 8 years, you lose out on the capital gain tax benefit.
Some other features of SGBs
- Individuals and HUF can invest 4 kg in gold which is not a bad maximum considering that it allows almost 2.2 crores at current prices. Family trusts can invest in up to 20 kg of gold.
- RBI issued the last tranche in December 2022 at nearly 53,000/gm.
- You can buy SGB both in physical or Demat form from any large bank like SBI, HDFC, ICICI, etc. The buying is almost frictionless, I personally bought it first, more than 5 years ago, and have found the process to be very easy.
- The reason SGB was launched was the Indian government wanted to reduce the huge imports of gold which was putting pressure on the foreign exchange reserves. The government wants to decrease physical imports and currently imposes a 12.5% duty on imports of gold.
