Sovereign gold bonds – should you buy them this Akshaya Tritiya 2023?

Returns from gold can be lumpy – several years of low returns followed by a few years of high returns. It, therefore, helps to have a longer holding period for gold.

Fuelled by fears of global recession and the banking crisis in the US in recent months, gold has gained 23 percent (in US dollar terms) since November 2022, shows data from the World Gold Council.

People tend to turn to gold in times of uncertainty. Given that gold fares well in periods when equity does not, it works well as a portfolio diversifier. Most experts suggest having 5-10 percent gold exposure in your portfolio. You can do this by buying gold in a staggered manner over a period of time.

Investing in sovereign gold bonds (SGBs) can be a good route to taking exposure to gold. SGBs are tax-efficient when held till maturity, are backed by a government guarantee, do not require storage space, and can fetch you an interest rate of 2.5 percent per annum. Unlike the expenses associated with buying gold ETFs and physical gold, there is no such cost associated with SGBs. Also, with the 20 percent tax with indexation benefit for non-equity mutual fund schemes (including gold ETFs and gold fund of funds) gone from April 1, SGBs have become more attractive tax-wise.

Akshaya Tritiya, which falls on April 22 this year, is considered an auspicious time to buy gold. Should you invest in SGBs this Akshaya Tritiya?

Gold prices play a spoilsport

With gold prices having shot up, it’s not the best time to invest in gold today. The numbers speak for themselves.

The issue price of SGBs in the latest March 2023 tranche was Rs 5,611 per bond. This is the highest-ever issue price since SGBs were first launched in November 2015. The lowest-ever price at which SGBs were issued was Rs 2,600 per bond in January 2016 reflective of the gold prices at that time.

SGBs are issued in denominations of one gram of gold and their issue price is a simple average of the price of gold (999 purity) for the last three business days preceding the subscription period. This is based on the data published by the India Bullion and Jewellers Association (IBJA).

“Given that gold prices have run up very sharply in the recent past, one can wait or stagger investments in gold over the next one year,” says Sandeep Jethwani, Co-founder of Dezerv.

On the other hand, this could be a good time to book profit on your gold investments this Akshaya Tritiya and allocate the money elsewhere. But don’t forget to account for the tax implications of such a move. Vishal Dhawan, Founder & CEO - Plan Ahead Wealth Advisors, says, “We would ideally advise investors to have 5-10 percent exposure to gold overall (not jewellery) at this point. If the exposure is above this range, we would suggest a rebalancing towards other assets.”

The SGB investment

SGBs are issued by the RBI on behalf of the government during a specified subscription period announced in advance. Each SGB represents the value of one gram of gold. Since their launch in November 2015, there have been 63 tranches of SGBs. You can apply for SGB issuances through select banks and post offices or your trading account with a broker.

Once the SGBs get listed, you can buy and sell them on the exchanges. You can buy a minimum of 1 gram and up to a maximum of 4 kilograms in a financial year. This includes bonds bought in the primary issuances as well as those on the exchanges.

Apart from the possibility of capital gains (appreciation in gold price between the time of purchase and redemption), SGBs offer investors an interest of 2.5 per cent per annum (on the issue price, paid semi-annually).

SGBs come with a tenure of 8 years but the RBI gives you the option of early redemption from the fifth year of issue on every coupon payment date. The redemption price is calculated in the same way as the issue price is. On redemption, both the interest and the redemption proceeds get credited to your bank account provided at the time of buying the bond. You must send a request for pre-mature redemption to your bank, post office or broker at least 10 days before the next interest payment date.

“You must send us the redemption form by post 10 days before the coupon payment date to have it processed on time. On redemption, the money will be credited to the bank account linked to your demat account,” says Mohit Mehra, Head – IPOs, Zerodha.

Trading on the exchanges

Unlike in the primary issuances, on the exchanges, the prices for SGBs (across different tranches) will depend on their traded volumes. The smaller the volumes, the more likely the SGB prices will deviate from their fair value (IBJA gold prices).

Kirtan Shah, Founder & CEO, Credence Wealth Advisors, says the volumes are adequate for retail investors but the SGBs typically trade at a discount to their fair value. So, as a seller, you must be willing to exit at that price.

In the context of selling SGBs, Mehra suggests one should place a limit order (so that the bonds get sold only at your specified price) instead of a market order (where the sale happens at the best available price) to avoid being taken by surprise on the price at which the sell order goes through.

For a buyer, while the SGBs on the exchanges may be attractive, you need to be able to pick the right SGBs based on their yields and how they compare with any new issues at that time.

Purely from the point of ease of buying and selling, gold ETFs with adequate trading volumes may score over SGBs. “SGBs are suitable for investors who have a long-term investment horizon and a passive allocation to gold (no active buying and selling),” says Jethwani.

Also read: Want to buy sovereign gold bonds? You can choose between the fresh issue and these six series traded on the NSE

Taxing matters

But when it comes to taxation, SGBs supersede gold ETFs, gold FOFs and physical gold provided you have a long holding period. Any capital gain on investments made in gold ETF and golds FOFs from April 1, 2023, onwards will be taxed at your income tax slab rate irrespective of your holding period. Capital gains from physical gold are taxed at your income tax slab rate if held for less than 36 months (short-term capital gains) and at 20 per cent with indexation if held for 36 months or longer (long-term capital gains). On the other hand, SGBs held until maturity (8 years) do not attract any capital gains tax.

But capital gains on SGBs sold before maturity in the secondary market are taxed. According to Archit Gupta, CEO and Founder of Clear, any capital gain on early redemption with the RBI from the fifth year onwards is also subject to taxation – at 20 percent with indexation.

The interest income from SGBs is taxed at your relevant slab rate.

Also read: Gold and silver ETFs suffer LTCG blow but still glitter

Long-term horizon helps

Finally, remember that returns from gold can be lumpy – several years of low returns followed by a few years of high returns (see earlier chart). It, therefore, helps to have a longer holding period for gold. This also helps lower the possibility of negative returns.

For example, 3-year gold returns (CAGR) over the last 30 years ranged from minus 10 percent to 36 percent. During this period, the 3-year returns were negative 16 percent of the time.

However, the wide variation in returns goes down as you extend your investment horizon, say to 10 years. There are also no instances of negative 10-year returns (which range from 2.4 percent to 21.3 percent) over this period (see chart).