Sovereign Gold Bonds: Secure, Profitable and Tax-efficient

Sovereign Gold Bonds (SGB) are a government-backed investment scheme issued by  RBI (Reserve bank of India) , which allows individuals to invest in gold and hold it in dematerialised (electronic) form rather than physical form. Hence is an alternative to holding physical gold which eliminates the risks and costs associated with storing physical gold. These Bonds are issued in denominations of one gram of gold and in multiples thereof.

How do SGB (Sovereign Gold Bond) works?

SGB are issued with a fixed subscription price (nominal price) having  maturity period of 8 years. SGBs are issued in denominations of grams of gold, with a minimum investment of 1 gram and maximum 4 kg. for individuals and HUF (Hindu Undivided Family) and 20kg. for trust and others eligible investors.The price of the bonds is linked to the prevailing market price of gold. Investors earn interest at the rate of 2.5% per annum, which is paid semi-annually. Upon maturity, investors receive the equivalent market value of gold in rupees.

 Advantages of Sovereign Gold Bond

There are many advantages of SGB, few of them are as follows;

• Risk free investment: As these bonds are backed by government of India, it make them a safe investment.
• No storage hassles: Since SGBs are held in dematerialised (Electronic) form, there are no storage or insurance costs.
• No risk of theft or damage: As it is held in electronic form, so there is no risk of theft or damage.
• Fixed interest income: Investors earn a fixed interest income at regular intervals providing them an additional income stream.
• Diversified Portfolio: It Helps investors to diversify their portfolio by  including an fixed interest assets class in their portfolio with lower risk. 
• Capital gains exemption: If these bonds are held till maturity, capital gain arising on maturity are exempt from tax for individuals.
• Transparency :The price of SGBs is linked to the market price of gold, hence value of investment moves in same direction depending upon change in prevailing market price of gold. Thus it ensures transparency in valuation.

Disadvantages of Sovereign Gold Bond 

There are few disadvantages of SGB which are as follows;

• Tax on interest income: As it is taxable in the hands of all investors.
• Low rate of Interest: It provides only 2.5% p.a. interest rate which is less than the interest rate on saving bank accounts and FDs.
• Lack of liquidity: As it has lock in period of 5 years and maturity period of 8 years.
• Risk of capital loss: As market value of investment is depends upon market price of gold so any fall in market price of gold will result in fall in market value of your investments.

How to Invest in Sovereign Gold Bonds?

Investing in SGBs is easy and accessible. Investment can be done by following below mentioned steps :

1. Check the Issuance Calendar : RBI announces the issuance of SGB periodically, so investor shall keep an eye on these dates for the investment opportunities.
2. Apply Online or Offline : Individuals can apply for SGB through banks, designated post offices, and online through internet banking platforms.
3. Complete the KYC Process: Provide the necessary Know Your Customer (KYC) documents, such as a PAN card, to complete the application process.
4. Receive Your Bonds: Once your application is approved, you will receive the SGB in your demat account or as a certificate of holding.

Taxation of  Sovereign Gold Bonds

After introduction of finance Act 2024,

• If SGB is held by individual till maturity, then on maturity capital gain is exempt under section 47(viic) of Income Tax Act 1961. However if SGB sold by individual before maturity then it is taxable for individual. 
• If SGB is held by any person other than individual till maturity or sold by such person before maturity, in both the cases it is taxable.
• No indexation is allowed on SGB.
• If SGB held for more than one year then it shall be considered as long term and on transfer (sell) long term capital gain tax  (LTCG) levied at the rate of 12.5%.
• If SGB held for less than one year then it shall be considered as short term and on transfer of SGB,  Short term capital gain tax (STCG) shall be levied at the slab rate  applicable to investor.
• Interest income on SGB is taxable for all investors at the slab rate applicable to such investors.

Conclusion

 Sovereign Gold Bonds are secure and profitable way to invest in gold, with some benefit like regular interest income, tax exemption and no storage hassles. Hence SGBs are an excellent choice for both seasoned investors and those new to investing in gold.  

FAQs (Frequently Asked Questions)