What makes sovereign gold bonds an attractive investment option?

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What makes sovereign gold bonds an attractive investment option?

Authored by Tejas Khoday, cofounder and CEO of FYERS

All Indian households have a strong love for the glitter of gold. And why not?

It is one of the most reliable, credible, and secured investments to hedge against inflation. Buying gold during Indian festivities is considered auspicious and significant in our culture.

However, a physical gold investment like jewellery, coins, or bars is precious but barred by certain limitations. Storage at banks involves expensive locker charges while keeping at home runs the risk of theft. Also, the purchase of gold jewellery involves additional making charges, which in turn makes it expensive.

To overcome these shortcomings, the Government of India launched Sovereign Gold Bonds (SGBs), a superior alternative to physical gold investment. SGBs are government-backed securities issued by the Reserve Bank of India, denominated in grams.

Overall, SGBs have aligned with the changing investor behaviour by offering a perfect mix of safety, convenience, and decent returns.

Sneak Peek into the Key Features of SGBs.

  • In a nutshell, SGBs are a form of digital gold investment issued by RBI on behalf of the government of India.
  • SGBs are denominated in grams of gold with a minimum investment of 1 gram.
  • The maximum investment limit is 4 kg for individuals and HUF (Hindu Undivided Family) and 20 kg for trusts and entities notified by the government.
  • You are entitled to a fixed interest rate of 2.5 per cent per annum on the initial investment, with payouts made semi-annually and the last instalment at the time of maturity.
  • The bonds have a fixed tenure of 8 years, with the flexibility to redeem after the 5th, 6th, or 7th year. Redemption of bonds can be done only on the interest payment dates.
  • You can easily invest in bonds through cash (up to ₹20,000), cheques, demand drafts, or any other electronic payment method.  
  • On maturity, the gold bonds get redeemed in Indian rupees calculated by taking a simple average of the closing price of gold of purity 999 of the previous three business days from the repayment date.
  • SGBs can be traded freely in the secondary market after 14 days from the subscription date, subject to the notice published by RBI.
  • You can save on applicable GST of 3 per cent
  •  on gold purchased, GST on making charges, and 1 per cent of TDS deducted in case of more than two lakhs of physical gold.  
  • You can invest in SGBs through Nationalised banks, Scheduled private or foreign banks, designated post offices, authorized stock exchanges, and Stock Holding Corporation of India Limited (SHCIL).

 

Know the Benefits of Investing in SGBs.

    1) SGBs are Cost-Effective.

  • SGBs are cost-effective in comparison to other gold investment options. In the case of physical gold investment, there is an upfront loss of 15-20 per cent in making charges whenever there is a change in the form of gold. Also, investing in physical gold involves additional storage, insurance, safety, and other costs. Counterproductive to this, SCBs can be held in a dematerialized form or as physical certificates. Investors are freed from the hassles of maintenance and making charges resulting in overall cost reduction. Also, compared to ETFs, SGBs are cost-efficient. There are charges like fund management at 1 per cent, brokerage charges at entry and exit, and other administrative charges for gold ETFs.

    2) SGBs come with a Sovereign Guarantee.

  • As you all know, SCBs are government-backed securities issued by RBI, and the level of security is very high. The prevalence of high security provides a sovereign guarantee of principal repayment and timely interest payments of 2.5 per cent per annum. SGB investor gain from two components, i.e., gold appreciation and interest payment. However, this is different from other gold investments. With a significant dependence on the gold price, there is no income assurance in the case of physical gold or gold ETFs. You gain if there is a price rise and vice-versa.

       3) SGBs are Tax Efficient.

  • Investments in SGBs are relatively more tax efficient than other gold investments. Generally, gold gets treated as a non-financial asset, and the holding period to treat it as short-term or long-term for capital gains is three years. For instance, if Mr X sells the gold within three years, the short-term capital gain is applicable. This gain will get added to X’s income and taxable following the tax slab. Alternatively, suppose it gets sold after three years. Then, the long-term capital gain will be applicable at 10% (without indexation) and 20 per cent (with indexation).

In contrast, capital gains are exempt from tax if they are held till maturity in the case of bonds. Premature sales of SGBs in the secondary market will attract applicable tax under the Income Tax Act, 1961. Interest on SGBs will be taxable as per the applicable slab rates.

    4) SGBs can be used as Collaterals.

People often struggle to furnish collaterals and are usually apprehensive about furnishing physical gold. With SGBs, there is an added advantage of using them as collaterals, thereby reducing the overall cost of credit.

Also, as the LTV ratio (Loan-to-value) is the same as the case of physical gold, the stress of the liquidation of SGB is minimized. Moreover, the interest earned on the SGB used as collateral is not withheld by the lending institution and transferred to the actual beneficiary.

    5) SGBs can be purchased from the Secondary Market.

Investors can also buy SGB from the secondary market. Interestingly, as the secondary market volumes for SGB are low, the unit price is trailing at a lower price than the market price. For instance, Mumbai’s 24K gold price is currently trading at around Rs 5,703, while SGB units are trading at Rs 5,580 on the NSE. Hence, SGBs usually trade below the prevailing market price.

Return on SGB is higher if you hold them till maturity as you get the final price directly from RBI. Premature sales of SGB will fetch you lower returns as you sell at a discounted price.  

Parting Thoughts

With a galore of investment options promising excellent returns, the gold investment continues to attract all sorts of investors. The evolution of newer forms of gold investments like SGB has streamlined investing and eliminated the flaws of physical gold investments.

SGBs, government-backed security characterized by minimal risk, tax efficiency, gold-linked returns, purity, and more, makes it an excellent fit for the portfolio. Nurture your wealth with SGBs and create a cushion to meet financial contingencies.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ. 

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