Sovereign Gold Bonds: The Reserve Bank issues government security in grams of gold on behalf of the Indian Government. These are called Sovereign Gold Bonds or SGBs.They are the best choice as you would get taxable interest income while saving LTCG tax, but this is if you have a horizon of eight years. These bonds can be bought from your own bank and sold directly or through agents through designated post offices, the Stock Holding Corporation of India Limited (SHCIL), or the BSE and National Stock Exchange of India. There are also options to apply for Sovereign Gold Bonds through Demat accounts such as Zerodha, ICICI Direct, etc.
SGBs have been launched by the Indian Government to give people an alternative to having physical gold. This article will cover what precisely these SGBs are, along with how they work and other such details.
Upcoming Sovereign Gold Bonds in 2020-21
The issuances of Sovereign Gold Bonds happen in accordance with the schedule of the RBI. Generally, a discount of ₹50 per gram is offered by the Reserve Bank of India to investors that are paying digitally on the original value. October 9, 2020, was when the Government of India announced the 2020-2021 Sovereign Gold Bond Scheme in Series VII, VIII, IX, X. XI, and XII. The bond’s price, in terms of the rupee, is fixed based on the last week’s simple average. And this of the closing price of gold that is of 999 purity, and this is published by the India Bullion and Jewellers Association Ltd.
Investing in Sovereign Gold Bonds
When it comes to buying gold as an investment, say about 10 grams as an example, it is always better to buy a 10 gram Sovereign Gold Bond. The tenure of this is for the duration of eight years, after which you would get the current price of 10 grams of gold after you redeem it. What’s more, is that the prices of gold are always expected to be rising, so this means that it will be profitable.
The main difference between buying bonds and buying physical gold is that the former would get 2.5-2.75% of the investment value annually. When this rate is compounded over the duration of eight years, it gives you an extra gain of almost 25%. If the assumption is to be made that the price of gold will rise by about 5%, then the annual return of the bonds would be 7.75%.
Now, if we take an example here, it will help in better understanding. If one is to invest ₹26,000 in SGBs and over right years the price of gold becomes one and a half times more, then the return would be ₹42,00 that is the gold appreciation being ₹13,400 and also an additional ₹6,493 that would be the resultant gain of 2.75% annually on the original amount that was invested. This means that buying SGBs is far better than getting physical gold.
The interests will be paid annually, which means that SGBs worth ₹52,000 are bought; with the annual interest of 2.5%, it would come to be ₹130,0, meaning that you would get ₹650 two times a year.
Price of Gold
It has been seen that the price of gold has been going up from the year 2015, and this picked up further in the year 2020 because of COVID-19. This was elevated even more by the large-scale quantitative easing measures that were taken by different central banks. Investors have also demanded safe havens because of fears of a global recession taking place because of the impact that the virus has had on the economies, and this too is said to support gold. However, the strong dollar and moderate physical activities may limit any major gains. Nonetheless, experts recommend that gold be a part of investment portfolios.
Buying Sovereign Gold Bonds
Investors get a Holding Certificate issued to buy these bonds, and they are eligible to be converted to Demat form.
- Buying on ICICI Direct: The process of buying SGBs here is fairly simple. All you need to do is log in to ICICIdirect.com with the credentials and then select the ‘FD/Bonds’ options to go further.
- Buying through Zerodha: Kite credentials are needed to log in to Zerodha, and then you can enter the quantity desired. The prices of the bonds are dependent on the issuance prices. However, it is important to note that the trading account needs sufficient funds on the day of the issue closing as the purchase will not be funded by Zerodha.
SGB Overview
In this section, we will look at a general overview of these bonds. As mentioned, SGBBs are issued on behalf of the Government of India by the Reserve Bank as government securities in the form of grams of gold. The customers are issued the Certificate of Holding on the date that the SGBs are issued. This certificate can be collected from the SHCIL offices, issuing banks, post offices, agents, designated stock exchanges, or even from the RBI directly through the email if the address is given on the application form that needs to be filled.
- Price: The price of these bonds is fixed in rupees, and this is based on the simple average of the 999 purity gold’s closing price as is published by the India Bullion and Jewellers Association for the previous week before the period of subscription. The issue price will be about ₹50 less than what the nominal value is.
- Interest: The bonds get an interest of about 2.5-2.75% annually, and this is credited to the bank account every six months. The final interest will be paid when maturity is reached with the principal amount.
- Tenor: The duration of the bond is of eight years, and there are exit options from the fifth year that can be exercised on the dates of interest payment.
- Minimum Investment: The bonds are issued in the denominations of one single gram of gold and then in the following multiples. The minimum investment from the Fourth Tranche is one gram. It was two grams earlier, and the maximum on the buying limit was 500 grams for one person each fiscal year. When it comes to joint holding, this limit is applied to the first applicant. But the annual investment limit per individual has been raised to 4kgs, while from tranche sold from October to December in 2017, the limit was raised to 20kgs for trusts and other such entities.
- Where to Purchase: The bonds are sold through the SCHIL, banks, post offices, and recognized stock exchanges like the NSE and the BSE.
- Options for Payment: Payments are made through cash with a maximum of h ₹20,00 or by electronic banking, cheque, or demand draft.
- Eligibility: The bonds can be bought only by residing Indian entities, including charitable institutions, universities, HUFs, and individuals.
- GST: When GST was introduced, investing in SGBs became a lot more attractive than buying physical gold. Before the 1st of July in 2017, gold bars and coins had the VAT of 1-1.2%, but they will now attract GST of 3%, and the same rate is applicable for jewelry as well. Until July 1st, there was a 1% excise duty on gold jewellery, but there was no such tax on coins and bars of gold.