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Sovereign Gold Bonds – An investment you can place your trust in

February 28, 2022 / 07:34 PM IST

Gold, in this age, is not just a shiny metal to make shimmering ornaments, but also a lucrative investment. However, despite the fact the yellow metal has lured many investors through its various schemes, a large section of the investors is still wary of investing in privately-run schemes. To reach out to such investors, the government of India in November 2015 introduced the Sovereign Gold Bond (SGB) scheme as an alternative to physical gold. Since SGBs are government securities, they have been able to gain the trust of cautious investors. Over the past few years, there has been a significant rise in investors for SGBs. These bonds are favoured by investors who want lesser risk but more returns on their investments. Here are a few things you must know before investing in Sovereign Gold Bond:

What are Sovereign Gold Bonds?

Sovereign Bonds are basically securities issued by the Reserve Bank of India on behalf of the government of India and their value is denominated in multiples of grams of gold with the minimum unit of 1 gram of gold at 999 purity. The cost of these units is calculated by taking an average of closing prices of gold for the recent three working days preceding the subscription period which is then published by the Indian Bullion and Jewellers Association (IBJA).

The SGBs are issued for a period of 8 years. However, an investor also has an option to exit in the 5th, 6th and 7th year on the dates of interest payment. These bonds offer a maximum limit of subscription of 4 kg in case of individuals and Hindu Undivided Family (HUF) and 20 Kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). In case the bonds are jointly owned, the limit applies to the first applicant.

The current interest rate for SGB is 2.50% annually on the initial investment by the investor. It is paid twice a year and the returns are usually linked to the ongoing market price of gold.

Who can invest in SGBs?

  • • Indian resident as defined under Foreign Exchange Management Act, 1999

  • • Individuals, HUFs, trusts, universities and charitable institutions

  • • Individual investors with subsequent changes in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

  • • Minors – application to be made by his/her guardian


How to invest in SGBs?

After consulting with the government, these securities are made available for subscription by the RBI in tranches. The application forms for it can be availed via banks, brokers, post offices and online platforms. The RBI also offers a discount of Rs 50 per gram if the form is purchased online. Since the RBI introduces new series of SGBs for sale in the market throughout the year, so in case someone misses out on the last one announced, he/she can wait for the next announcement. Applicant’s PAN number is mandatory for availing of these securities. The certificate of holding is issued on the date of issuance of the SGB.

Taxation

The interest obtained from the SGBs is taxable as per IT Act, 1961. The capital gain on the maturity amount is completed exempted from tax if the investor holds it for entire 8 years. However, the profit earned from the sale of gold bonds on the stock exchange before maturity is liable to be taxed.

Redemption

The interest and redemption amount is credited to the customer’s account provided at the time of buying the bond.

Benefits and risks of Sovereign Gold Bonds:

Benefits

Sovereign Gold Bonds are free from risks such as purity of gold and storage - which are associated with investments in physical gold
Unlike physical gold, SGBs earn interest at a fixed rate of 2.50% (on issue price) is the guaranteed annual interest
The tax exemption on the capital gains on maturity makes these bonds an attractive long-term investment.
An investor receives indexation benefits if he/she transfers the bonds before maturity

Banks accept SGBs as security against loans

Risks

Since gold rates largely depend on the market performance, the capital is at risk in case of drop in the gold rates.

Moneycontrol journalists were not involved in the creation of the article



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first published: Feb 28, 2022 07:24 pm
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