What is Gold Bond Investment?

It’s not surprising that India’s household gold reserves account for about 40% of the GDP of the country. After all, most Indians consider gold one of the safest forms of investment. But investing in physical gold also comes with its fair share of issues. Here are the most important ones-

• Buying physical gold is costly
• Storing gold is expensive because it requires additional security
• You get value out of your gold holdings only after you sell them
• You lose up to 15% to 20% of the value of the gold by making charges every time you change the form of gold

But what if you could make better gold investments? Investments that are a lot cheaper, guarantee better returns, and help you save on taxes? We’re talking about gold bonds!

Wondering what these gold bond investments are? Here are a few things about these bonds you need to know.

What is a gold bond?

Put simply, a sovereign gold bond (SGB) is a type of government security that is a substitute for physical gold. Investors can buy these bonds from the RBI on a per unit basis, wherein every gram of gold issued as per the bond has 999% purity. And that’s not all. Investors can buy and hold the bond for a term of eight years and earn interest at a rate of 2.5% every year on them.

Investors can also buy SGBs anytime at a cost equivalent to the closing price of gold from three working days before the point of purchase. And they can redeem the bond by selling it at a price according to the latest base data.

Now that you know what a gold bond is all about, let’s take a better look at how they work.

How do SGBs work?

Typically,government gold bonds or SGBs get issued by the RBI in small numbers or tranches throughout the financial year. Investors can buy these bonds via banks, brokers, online platforms and even post offices! Investors can buy SGB units from secondary markets like stock exchanges too.

Investors can choose to get physical, dematerialized, or digital SGBs from any distributor. They need to subscribe for the SGB by paying the issuance cost by cash, DD, cheque, or other digital payment modes to get their SGBs. Keep in mind that investors buying physical bonds will need to credit their bonds with their DEMAT accounts by putting in a special request.

Once the government gold bonds reach maturity, investors can redeem them at the market value of gold at that time. Not to mention, investors holding the bond also earn interest at a fixed rate on their holdings annually.

Benefits of gold bond investments

• Tax benefits

Gold bond investments have greater tax benefits compared to physical gold. This is because physical gold is treated as a non-financial asset with a holding period of three years. Any sale during this period is subject to short term gains tax at the peak rate. Post this holding period, sales attract taxes as long-term gains. Here the taxation rate will be 10% without indexation benefits or 20% with indexation benefits.

But gold bond redemptions are tax-free, and investors can redeem them after five years of holding. Keep in mind that the interest on bonds is subject to taxation according to Section 43 of the Income-Tax Act, 1961, and gold bonds sold in stock markets will still be taxed at extant rates.

• Interest earnings

Unlike physical gold, investors earn interest at 2.5% on their SGBs. The interest earned partially compensates for inflation risks even after taxation, given that the RBI assures the returns.

• They can be used as collateral

Investors can use government gold bonds as collateral for loans. The loan to value ratio (LTV) will be similar to regular gold loans. However, the decision to grant the loans in exchange for SGBs will be in the hands of the lender.

Features of Sovereign Gold Bonds Scheme

Here are the features of sovereign gold bonds:

• Price Calculation: The price is calculated using the average of the closing prices of 999 purity gold for the past three days as set by the Indian Bullion and Jewellers Association Limited (IBJA).
• Regular Interest Pay-outs: A coupon rate of 2.5% annually is disbursed bi-annually to investors.
• Fixed Tenor: These are issued for a fixed period of eight years, with withdrawals allowed from the fifth year onwards.
• Premature Withdrawal: Individuals cannot liquidate their investment before five years. It can only be facilitated in the 5^th, 6^th or 7^th year of the tenor and will be processed on the days of interest disbursement.
• Resale of Sovereign Gold Bonds: Once 14 days have lapsed from the initial subscription date, these can be traded on the secondary market. This is subject to any notice published by the RBI. Further, for trading in the stock market, a holding certificate has to be digitised and stored in the investor’s Demat account.
• Subscription Quantity: Subscriptions are made as gold grams. The minimum investment must equal 1 gold gram, while the maximum can equal 4 kg of gold grams for individuals and Hindu Undivided Family (HUF). Corporations and trusts can subscribe to a maximum of 20 kgs.

Limitations of Gold Bonds

Here’s a look at the shortcomings of Gold Bonds:

• Have an Inverse Correlation to the Stock Market

An upward movement in the stock market usually means a fall in gold prices. During a time of economic property, companies perform well due to a surge in demand. As a result, the prices of gold bonds are usually low during this period. 

• Sensitive to Fluctuations in Currency

An appreciation in the US Dollar, which is usually considered the benchmark currency, causes the price of gold to fall due to a rise in inflation rates. 

• Rule of Taxation

Sovereign gold bonds, for tax purposes, can be categorised into capital gains earned on the maturity of the bond and interest earnings that are disbursed semi-annually. While investors holding the gold bonds for their entire term must pay long term capital gains tax, the interest income is taxed under ‘income from other sources’ according to the tax slab you belong to.

Who Should Consider Investing in Sovereign Gold Bonds?

A sovereign gold bond scheme is amongst the most profitable investment options. This is because of their considerable benefits and comparatively lower shortcomings. That said, these are most ideal for individuals who have a low risk appetite but want to gain significant returns in the long run.

Sovereign gold bonds also allow investors to diversify their portfolios, which helps cushion their investments from adverse changes in the stock market. You see, in case the stock market falls, the value of your gold bonds will rise, helping you mitigate the overall risk to your investment portfolio.  

What’s more, when compared to gold ETFs and physical gold investments, sovereign gold bonds are much more profitable as these are backed by a government-mandated scheme.

If you’re planning on purchasing sovereign gold bonds, be sure to analyse your financial goals and investment time frames to make an informed decision.

In conclusion

Now that you know what a gold bond is, you will agree that buying one is far more profitable than buying real gold. After all, with an SGB, you get all the benefits you get while investing in physical gold, along with better interest rates and tax exemptions. What’s more, you can have peace of mind because you don’t need to worry about storing physical gold and keeping it safe.So, if you want to diversify your portfolio and invest in gold, do it the smarter way with gold bonds. Check out Tata Capital’s Moneyfy app today!

FAQs

What is Sovereign Gold Bond (SGB)? Who is the issuer?

These are certificates issued against gold grams. The RBI issues sovereign gold bonds on behalf of the Government of India.

Are there any risks in investing in SGBs?

As with all investment avenues, SGBs also have risks. There is a risk of capital loss in case the market price of gold falls. That said, SGBs have a lower risk compared to other investment avenues, such as shares in the stock market. 

Who is eligible to invest in the SGBs?

Individuals who are residents of India are eligible to invest in sovereign gold bonds (SGBs). Hindu Undivided Family (HUF), trusts, charitable institutions, and universities are also eligible to invest in SGBs.

Can a Minor invest in SGB?

Yes, a minor can invest in SGB. However, their guardian must make the application on the minor’s behalf.

Who are the authorized agencies selling the SGBs?

SGBs can be sold by Nationalised Banks, Scheduled Foreign Banks, Scheduled Private Banks, Stock Holding Corporation of India Ltd (SHCIL), Designated Post Offices and authorised stock exchanges.