Sovereign Gold Bond (SGB) Explained

Sovereign Gold Bond SGB

What is Sovereign Gold Bond (SGB)?

SGBs are government securities (issued by Reserve Bank of India on behalf of Government of India) denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price and the bonds will be redeemed at time of maturity.

What is the advantage of SGB over actual physical gold?

  • Purity of Gold
  • The quantity of gold for which the investor pays is protected
  • Government pays nominal interest rate each year
  • There is no additional cost impact of ‘making charges’ which is charged, if bought in physical form
  • It reduces risk and cost of storage associated with keeping physical gold
  • The bonds are held in the books of the RBI or in dematerialize form eliminating risk of loss of physical certificate

Benefits of Sovereign Gold Bonds

What about risks associated with SGBs?

Only risk is of price of gold at time of redemption / maturity. Capital loss will be there, if actual gold price falls below the purchase price.

Can I apply for SGBs?

Any person resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors includes  individuals, HUFs, trusts, universities and charitable institutions. Also you can invest in joint holding as well as on behalf of the minor his/her guardian.

I was resident, but now I am no longer resident. What happens to SGB I bought?

You can continue to hold SGB till early redemption/maturity, which you bought when you were eligible.

How can I apply for the bonds?

You can fill in the application form provided by the issuing banks/SHCIL offices/designated Post Offices/agents. You can also download application form from the RBI’s website. Banks may also provide online application facility. Lastly, you can also apply via your stock broking account (would be listed under Bonds at time of issuance).

How much can I invest? Is there any minimum or maximum limit?

The Bonds are issued in denominations of 1 gram and in multiples thereof. Hence, minimum investment needs to be 1gm. Maximum limit is 4 kg for individuals, 4 kg for 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 of joint holding, the limit applies to the first applicant. 

For purpose of annual ceiling – it will include all SGB subscribed under different tranches during initial issuance by Government and those purchased from the secondary market.

What is the rate of interest and how will the interest be paid?

The Bonds bear interest at the rate of 2.50 per cent (fixed rate) p.a. on the amount of initial investment, i.e. issue price. 

Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

Is allotment guaranteed?

Yes, If you meet the eligibility criteria, produces a valid identification document and transfer the application money on time, allotment is guaranteed.

You can apply online (digital application) to be eligible for Rs 50 per gram discount as compared the issue price

How is the gold price arrived at?

The nominal value of SGB is in Indian Rupees fixed on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period.

What is the duration of bonds? Can I exit before the maturity?

Bonds are issued with tenor of 8 years. Early redemption of the bond is allowed after fifth year from the date of issue on interest payment dates. The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.

How will maturity price of Gold arrived at?

Similar to issuance procedure, maturity amount would be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of maturity, published by the India Bullion and Jewelers Association Limited.

Is it possible to gift the bonds?

The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria. Transfer can be done by execution of an instrument of transfer which is available with the issuing agents.

Can I use bonds as collateral for loans?

Yes, bonds are eligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC).

What are the tax implications on i) interest received and ii) capital gain?

Interest on the Bonds will be taxable

Long term capital gain is tax free, if redeemed at time of maturity. Redemption prior to maturity will make the long term capital gain taxable

Indexation benefit is available, for computation of Long term capital gain tax, if transferred before maturity

Note, no TDS is applicable on the bond. However, it is the responsibility of the respective bond holder to comply the taxation requirements.

Can I trade these bonds?

The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006. Partial transfer of bonds is also possible.

How does It compare to Gold ETF and Physical Gold?

SGB, Gold ETF, Physical Gold comparison
I consider, it has better edge compared to Gold ETF, if held till maturity, as long term capital gain is tax free. 

When is the issue opening for future tranches?

Closed and upcoming issues are as below:

Tranche Date of Subscription Date of Issuance Status
2020-21 Series VII Oct 12 - 16, 2020 Oct 20, 2020 Closed
2020-21 Series VIII Nov 09 - 13, 2020 Nov 18, 2020 Closed
2020-21 Series IX Dec 28 2020 - Jan 01, 2021 Jan 05, 2021  
2020-21 Series X Jan 11-15, 2021 Jan 19, 2021  
2020-21 Series XI Feb 01- 05, 2021 Feb 09, 2021  
2020-21 Series XII Mar 01- 05, 2021 Mar 09, 2021  


Drop in your comment for any additional questions / suggestions.

Public Provident Fund (PPF) Explained

The Public Provident Fund is a sound savings cum tax saving instrument in India. Started in 1968 by the National Saving Institute of the Ministry of Finance. It is a long term saving instruments with stable return and zero capital risk, bundled with tax savings feature giving extra edge.

Should you open a PPF account?

This is ideal for an individual who are risk averse. Having said that, I personally feel, everyone should have this as a part of their investment strategy. This can be used to allocate debt component of the portfolio. Obviously with the limits, which we will see further below.

Who can open a PPF account?

Any individual Indian citizen residing in India can open PPF account. Parent can open account in the name of minor children. While opening account for minor, one of the parent’s PAN is required. Remember, tax savings will continue to be at Rs 1,50,000 for both account put together i.e. of parent and minor child.

You cannot open Join account, it's for individual.

Non-residents are not permitted to operate PPF account but can continue the existing account till it matures. No further extension of 5 years is available, once it matures.

Hindu Undivided Family as known as HUF is no longer permitted to open PPF account (notification no GSR 291(E) dated May 13, 2005). In order to claim deduction u/s 80C, HUF can contribute to the PPF account of its members and claim tax deduction

Who can open PPF account?

Where you can open PPF account?

You can open PPF account in either Post Office or Bank.

Banks accepting the PPF accounts are - designated branches of State Bank of India and its subsidiaries, ICICI bank, Axis bank, HDFC bank and few others.

Amount of deposit

Minimum deposit in each financial year should be of Rs 500 and maximum can be Rs 1,50,000

Deposits can be made in multiple of Rs 50 and any number of times in a financial year. Earlier, a maximum of 12 deposits were only permitted in a financial year.

PPF Investment Limit

You can see the power of compounding very well in this instrument. For example, considering interest rate stay at 7.1% and you continue to invest annually to the maximum permissible investment of Rs. 1,50,000 at the beginning of the year – over 15 years, you will end up with sound corpus of Rs. 40.7 lakhs. You can see by Year 10, interest compounding is significant and interest earned is becoming higher compared to the amount deposited each year.

PPFReturn

(Tip - You can use excel built in function FV to do the quick calculation)

Interest Rate

Interest rate is fixed by the Finance Ministry every quarter. The current PPF interest rate is 7.1%. Though the interest is calculated every month, it gets credited to your account on 31st March every year. Also, the PPF interest is calculated on the minimum balance between the fifth and the last day of the month.

For example: You have a balance of Rs 1 lakh in your PPF account on 30th April. Now, let's imagine you deposit ₹10,000 in your PPF account on 3rd May and ₹5,000 on 30th May. Now, the interest on your fund for the month of May will be calculated on Rs 1.10 lakh and not Rs 1.15 lakh

Taxation

Investments up to Rs. 1.5 lakh is eligible for tax deductions under Section 80C

PPF falls under EEE Category, i.e. Exempt – Exempt – Exempt, which basically means

The amount you deposit is tax exempt [under Section 80 C]
The interest on deposit is tax exempt [under Section 10(15)]
Final maturity amount is also tax exempt

Note:

  • Always disclose Interest earned in PPF account as part of Exempt income in your tax returns
  • All the balance that accumulates over time is exempted from wealth tax computation

Inactive PPF account

For any reason, if you do not deposit minimum amount of Rs. 500 in any financial year, account gets inactive. However, to re-activate, you can pay the minimum amount of Rs. 500 for each financial year you have not deposited together with nominal penalty of Rs. 50 for each such financial year and get your account re-activated.

Lock in period & Premature closure

The minimum lock-in period of a Public Provident Fund is 15 complete financial years from the end of the year in which the account was opened . On maturity, you can withdraw your entire corpus. If you wish to continue for a longer period, you can continue to do so (with or without making additional contributions) by applying for the extensions in 5 year blocks. There is no limit on how many time you can extend after the initial lock-in period of 15 years.

PPF Lockin Premature closure

One can prematurely close the account after 5 years from the opening of account under specific circumstances

  • Treatment of life threatening disease of the account holder, his spouse or dependent children or parents, on production of supporting documents and medical reports confirming such disease from treating medical authority
  • Higher education of the account holder, or dependent children on production of documents and fee bills in confirmation of admission in a recognised institute of higher education in India or abroad
  • On change in residency status of the account holder on production of copy of passport and visa or income tax return

Premature closure of PPF accounts will lead to 1% lower interest than the rate at which interest is credited to the account

Loan against PPF account

An advantage of PPF accounts is that you can take a personal loan against the balance in your PPF account provided your PPF investment is not due for withdrawal. This loan can be availed between the third and the sixth financial year of opening the account. The loan amount is limited to 25% of the balance at the end of the second financial year prior to the year in which you applied for the loan. You are not required to pledge a collateral when taking a loan against your PPF account.

Under the new rules, the rates at which the account holder can borrow from his account has been reduced to 1% above the prevailing PPF interest rate, from 2% earlier. In case of death of the account holder, the nominee or legal heir shall be liable to pay interest on the loan availed by the account holder but not repaid before his death. Such amount of due interest shall be adjusted at the time of final closure of the account.


Summary of the salient features of PPF account:

  • Deposit any amount between Rs. 500/- (minimum) and Rs. 1,50,000/- (maximum) in a financial year
  • Current Rate of Interest Payable (Currently as on Oct 20, it is 7.1%)
  • Loan facility is available from 3rd financial year up to 6th financial year
  • One withdrawal is permissible every year from 7th financial year
  • Account matures on completion of 15 complete financial years from the end of the year in which the account was opened
  • After maturity, account can be extended for any number of a block of 5 years with further deposits
  • Account can be retained indefinitely without further deposits after maturity with the prevailing rate of interest
  • Deposit in PPF account is qualified for deduction under Sec 80C of Income Tax Act
  • Interest earned in PPF account is completely exempted from Income Tax under Sec 10(15) of Income tax Act
  • The amount in the PPF account is not subject to attachment under any order or decree of a court of law

Frequently Asked Questions

Q: Can you open 2 PPF account?

A: No, only one PPF account can be opened by an individual

Q: Can I close my PPF account early?

A: Under specific circumstances, you can withdraw after completion of 5 years. So for example, if you open an account in Jan 2020, you can begin making partial withdrawal starting FY 2025-26

Q: Can I extend PPF account for 4 years after maturity?

A: No, extensions can be done only in block of 5 years

Q: I deposited amount in my child’s name, can I claim benefit?

A: Yes, if your PAN is used to open the minor’s account, you can claim the benefit of deposit. However, overall deposit cannot exceed Rs. 1,50,000 and so the benefit.

Q: Can I transfer my PPF account?

A: Yes, you can transfer your PPF account from one branch to another

To conclude, it’s one of the most wonderful investment option for risk averse investor.

Resource: Historical PPF interest rates

Period Rate of Interest
1968-69 4.80%
1969-70 4.80%
1970-71 5.00%
1971-72 5.00%
1972-73 5.00%
1973-74 5.30%
1 Apr 1974 to 31 July 1974 5.80%
1 Aug 1974 to 31 Mar 1975 7.00%
1975-76 7.00%
1976-77 7.00%
1977-78 7.50%
1978-79 7.50%
1979-80 7.50%
1980-81 8.00%
1981-82 8.50%
1982-83 8.50%
1983-84 9.00%
1984-85 9.50%
1985-86 10.00%
1 Apr 1986 to 31 Mar 1999 12.00%
1 Apr 1999 to 14 Jan 2000 12.00%
15 Jan 2000 to 28 Feb 2001 11.00%
1 Mar 2001 to 28 Feb 2002 9.50%
1 Mar 2002 to 28 Feb 2003 9.00%
1 Mar 2003 to 30 Nov 2011 8.00%
1 Dec 2011 to 31 Mar 2012 8.60%
1 Apr 2012 to 31 Mar 2013 8.80%
1 Apr 2013 to 31 Mar 2016 8.70%
1 Apr 2016 to 30 Sep 2016 8.10%
1 Oct 2016 to 31 Mar 2017 8.00%
1 Apr 2017 to 30 Jun 2017 7.90%
1 Jul 2017 to 31 Dec 2017 7.80%
1 Jan 2018 to 31 Sep 2018 7.60%
1 Oct 2018 to 30 Jun 2019 8.00%
1 Jul 2019 to 31 Mar 2020 7.90%
1 Apr 2020 to 31 Dec 2020 7.10%

What is Repo and Reverse Repo Rate?

If you are tuned to stock market or general economic news, you would have heard this term come up every time there is central bank’s credit policy meet. Here’s an attempt to explain what does this rate mean? and how does it affect you?

What is Repo Rate?

We all put our money in bank or borrow from bank at particular interest rate. Similarly, rate at which central bank (in case of India – Reserve Bank of India aka RBI) lends money to commercial banks in the event of any shortfall of funds is called Repo rate. 

Why is it important?

This is very important tool for authorities to control inflation. In case of inflation, the central bank increase repo rate as this acts as disincentive for commercial banks to borrow from the central bank. Which effectively reduced the money supply in the economy and thus helps in arresting inflation. 

Let’s just summarize above explanation

  • Repo Rate serves as control mechanisim for the central bank for increasing / decreasing liquidity in the economy
  • Change in Repo Rate impacts the cost of borrowing for commercial banks
  • It is a key tool used by the central bank to fight inflation and achieve price stability in the economy
  • Repo rate changes can lead to changes in interest rates from deposits and interest rate applicable to loans

What is Reverse Repo Rate?

This is exactly opposite of Repo Rate. This signifies the rate at which the central bank (RBI) borrows money from the commercial banks. 

An increase in reverse Repo Rate will decrease money supply in the economy and vice-versa. Increased Reverse Repo Rate will incentivise the commercial bank to park their funds with central bank and vice-versa.

RBI Repo Rate explained


Both this rate forms part of central bank’s monetary policy instruments which helps in controlling the money supply in the country and thereby controlling the inflation.

Calculator: Return on SIP investment

Most suggested route in personal finance world to achieve long term financial goal is via making regular investment or popularly known as Systematic Investment Plan or SIP.

Now, this brings important questions

  • How much you can expect to save, if you invest an X amount for Y period at expected rate of Z%?

  • How much return will differ, if I save at the beginning of the month or at the end of the month?

  • What is the absolute return %?

  • What is the effective annualized return? etc.

To answer this basic questions, I have made small Excel spreadsheet, feel free to download from here and play around.

Excel Calculator - SIP Return

Drop in a comment for any feedback.


Basics of Dividend Yield

What is Dividend?

Companies distribute a portion of their profits to shareholders, which is called dividend. In Indian market, dividends are generally issued as Interim or Final. Interim means dividends issued during the year, while Final dividend means the amount issued at the close of the financial year.


What Is Dividend Yield?

Dividend yield is always expressed as a percentage (%) – this is the ratio between dividend and stock price. This is used to measure the amount of cash Dividend company pays as a % to it’s stock price.


Dividend Yield

Understanding this % a bit more

It’s important to remember, the stock price will vary at any given point of time – this makes the Dividend Yield % very dynamic. For instance, a Company is issuing Rs 10 as annual dividend, when the stock price is at Rs 200 – dividend yield would be computed as 10 / 200, i.e. 5%. Now if Company’s stock price drops to Rs 100 and still continues to issue Rs 10 as annual dividend – dividend yield would be 10% (i.e. 10/100). You can see, there is huge growth in dividend yield % at cost of drop in share price.

Myth

High dividend yield are safe. This is absolute myth - classic case in Indian market is Coal India. Following chart says it all:

Important

- It's important to understand Dividend taxability while planning to build Dividend portfolio
- Dividend yield should not be sole criteria while building dividend portfolio. It's important to see the growth trends, moat of the Company etc.

You can check out the list of Government companies having high divided yield here at StockXplain site.

Growth Calculation with negative numbers

Once in a while, you face a situation wherein growth % is to be calculated – where one of the number is negative. Here’s quick approach and my thoughts.

Ideal approach used to calculate the growth is 

How to calculate Growth %

Approach 1: (Current Number / Old Number) -1

Few people follow the approach of differential, like

Approach 2: (Current Number – Old Number) / Old Number

Both are good to use as long as both the numbers are positive. Let’s take a quick example: 

Scenario 1: Say Previous quarter profit was at 100 and current quarter profit is at 120 – growth in profit would be calculated at 20% using either of the formula.

Approach 1: (Current Number / Old Number) -1 = (120 / 100) -1 = 0.2 or 20%
Approach 2: (Current Number – Old Number) / Old Number = (120 – 100)/100 = 0.2 or 20%

Scenario 2: Assume that current quarter there is a loss of 20 and previous quarter was profit of 100, in this case outcome would be as follows:

Approach 1: (Current Number / Old Number) -1 = (-20 / 100) -1 = -1.2 or -120%
Approach 2: (Current Number – Old Number) / Old Number = (-20 – 100)/100 = -1.2 or -120%

Which basically means, profit is negative 120% compared to previous quarter

Scenario 3: Now considering you move to next quarter, where in you have profit again, say, 50. So previous quarter is -20. How do you calculate growth? Let’s try following standard approach:

Approach 1: (Current Number / Old Number) -1 = (50 / -20) -1 = -3.5 or -350%
Approach 2: (Current Number – Old Number) / Old Number = (50  – negative 20)/-20 = -3.5 or -350%

As you can see – this absolutely doesn’t make any sense. Where in positive movement in growth is shown as negative growth %. 

Alternate Approach

Few people follow the approach of converting negative number to positive  while calculating (in excel using ABS or Absolute formulae). But this approach ends up showing the number, which is quite mis-guiding in itself. 

Approach 1: (Current Number / Old Number) -1 = (50 / 20) -1 = 1.5 or 150%, here negative number of previous quarter is converted as positive to compute the growth.

As you can see, the outcome of 150% is quite mis-leading in such cases. 

Personally, I feel to keep the Growth % as “nm” or not meaningful when the base is negative. 

How do you approach to such situation?

Gold Prices in India

I was working on small project and looking at the data of Gold prices. Here's Google spreadsheet, if anyone wants to play with the data.

Interesting facts - Compounded annual growth rate of Gold from 1947 to 2019 is at 8.5%, that's the compounded return you got for staying invested for 73 years (I am using both 1947 & 2019 as inclusive). I also stumbled upon wonderful analysis done by Jago Investor while looking for data.

Gold Prices India

Absolute prices does lot of psychological damage to us ;)