November 09, 2020

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. 

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