All of us remember the good old days, don’t we? As soon as our parents would get some extra investible money, the first point of investment would always be gold, and thus many of us have an emotional connection with gold since it has been an Important part of our lives ever since. However, with changing times, Gold has also evolved, like a lot of Other things, to become digital in the form of Gold Mutual Funds, Gold exchange-traded funds, and Sovereign Gold Bonds (SGB).
In this particular article, we will focus on and Understand more about Sovereign Gold Bonds (SGB).
What are Sovereign Gold Bonds?
Sovereign Gold Bonds were introduced by the Government as a substitute for or alternative to Physical Gold. These are very safe investments in Gold and are measured in terms of Grams of Gold. The SGB scheme was launched in 2015 and, since then, has been very well accepted by investors in General. One of the reasons to also launch a SGB fund was to reduce demand for and dependency on physical gold.
The RBI decides and rolls out a Series of Tranches every year. They started in 2015 with two tranches and are now averaging 10–12 tranches a year. Investors are given a certificate of holding, which acts as a proof of investment, and they are issued as stocks under the Government Security Act of 2006 and hence are termed government-backed and safe.
SGBs are available to Indian Citizens who are Individuals, Trusts, or charitable institutions for investments. One can buy a Minimum of one gram to a Maximum of four kilograms in a given Fiscal Year. Trusts can buy up to 20 kilograms in any given fiscal year.What are the Benefits of SGB?
SGB are calculated as per the real-time Gold Price on the Bullion since it is highly pure and held in electronic form. Hence, the price of your SGB would increase or decrease as per the prices of Gold in the Outside Market. The Bonds are also given a fixed interest rate of 2.5% per annum, which is paid semi-annually.
The price of Gold in July 2013 was close to Rs 42,000 and in July 2023 will be more than Rs 63,000, which basically means that the price of Gold has grown at 8% over the last 10 years, which makes it a good, stable substitute for a debt investment. Add to this the 2.5% interest that is given per annum on this investment, and the return would turn out to be more than 9.5% per annum.
SGBs are traded on the stock exchange, which makes this investment highly transparent and regulated, thereby reducing the risks of default and capital erosion to a great extent.
How long should I Hold my SGB?
SGB comes with a lock-in of 8 years but can be traded on the stock exchange after being held for 5 years. In the event that the SGB is not encashed before the 8th year, the SGB matures at the end of the 8th year, and the proceeds are credited to the investor’s account. The proceeds include the price of the Gold on the present day along with the annual 2.5% return given semi-annually over the period of 8 years.
Can I Sell my SGB before the fifth Year? (Check)
SGBs can be sold in the secondary market if the investor wants to sell them before the 5th year. The onus of finding a Buyer for such a transaction will solely lie with the investor. If the SGB is sold before the 3 years since issuance, it will attract short-term capital gains.
Taxation on SGB
SGBs are exempt from capital gains tax if they are redeemed at maturity. However, the Interest of 2.5% will be treated as Income from other sources and will be taxed marginally as per the IT Act of 1961. In case it is redeemed or transferred after the 5th year Lockin period but before maturity, long-term capital gain taxation would apply to the SGB at 20% plus cess, along with indexation benefits.
Opinion on SGB
SGB is a good investment, and one can park up to 10% of their investments in this asset class. SGB offers a stable return and, given its historic performance of 8% CAGR over the last ten years, would act as a suitable hedge against inflation. SGB would also give the investor some stability in their overall portfolio, given that it is a safe and secure investment. Some banks also accept SGB as a valid collateral incase of a loan requirement and treat such a loan as a Gold loan, which adds to the liquidity factor incase of an urgent cash requirement. Add on the fact that the investment attracts no capital gains if held until maturity, making this a very viable long-term investment option.
