All you want to know about Sovereign Gold Bonds

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold and are substitute for holding physical gold. The best part about gold bonds is that apart from the market prices, you also earn 2.5% interest, which is payable semi-annually on the initial value of investment. It is not a very old scheme as the first tranche of sovereign gold bonds scheme was launched in 2015. As on January 19 , around 59 tonnes of gold have been sold through SGBs. Though there is a sovereign guarantee there is no physical backing of gold in SGBs.

Features: 

Interest Rate

The simple interest rate is fixed at 2.50 % per annum by the government. The interest is payable half-yearly and on maturity the market value of gold is paid along with the interest earned.

Issue Price

The issue price of SGB is based on an average closing price of gold of 999 purity for the last 3 working days of the week preceding the subscription period. These rates are published by the India Bullion and Jewellers Association Limited. There is an added advantage if you go online as prices get reduced by ₹50 per gram for those who subscribe online and pay through digital mode.

Investment Limit

One can invest a maximum of 4 kg annually in these bonds. The minimum limit is 1 gram of gold.

Tenure

The bonds come with the tenure of eight years. You can, however, exit in the 5th, 6th and 7th years on the interest payment dates. Investors who bought the first issue of sovereign gold bonds could exercise an exit option in November 2020. The first issue was launched in November 2015 at ₹2,684 per gram.

Issue Format

When you invest in SGB a holding certificate is issued. The certificate is the proof of possessing gold. You can also apply it in a demat form as it helps you to trade on the stock exchange. Having said that, it has been observed that practically it is very difficult to sell bonds on the exchanges because of low liquidity.

Collateral

SGBs can also serve as collateral for the purpose of availing loan.

Taxation

SGBs have an advantage over all other modes of holding gold as no tax is levied on the redemption of SGB after completion of the maturity period. If you, however, sell it before 36 months from the date of purchase, then the gains will be taxable as Short Term Capital Gains. The amount is added to your gross total income and taxed as per your income tax slab. For gold held more than 36 months, the profit is categorized as Long Term Capital Gains. LTCG is taxed at 20% post indexation along with applicable surcharge and cess.

Sovereign Gold Bonds is one of the best ways to hold digital gold. But before investing remember, there may also be a risk of capital loss if the market price of gold declines. However, even if the prices decline, the units of gold, for which you paid, remains the same.