Gold is one of the most traditional forms of investment. However, storing gold physically has always been an issue for space and safety reasons. With that, the Indian government launched the sovereign gold bond scheme, a form of investing in gold that offers several extra benefits for both conventional and new investors.
So, with this new sovereign gold bond scheme, investing and owning gold has got a lot easier and doesn’t bother much when it comes to storing and maintaining gold as well. So let’s understand more about this, shall we?
A sovereign gold bond scheme issues bonds that use gold as an underlying asset. First issued in November 2015, The Reserve Bank of India gives the bonds on behalf of the government. These bonds are a safe investment tool since gold rarely gets affected by market fluctuations. As a result, these gold bonds will serve as an excellent alternative for physical gold. At maturity, both the purchase and redemption are made in cash rather than gold.
Sovereign gold bonds (SGBs) are issued for a fixed time, which is announced by the RBI. Usually, the RBI issues a press release announcing the issuance of the latest sovereign gold bonds and a one-week window through which interested parties can invest. A holding certificate is given to the investors after purchasing the bond.
As the name suggests, their worth is expressed in multiple grammes of gold. The gold is sold on a unit-by-unit basis. You can buy SGBs in multiples of 1 gram. Hence, the minimum holding is 1 gram, and the maximum is 4kg per investor per financial year.
Individuals, as well as the Hindu Undivided Family HUFs, can invest in the sovereign gold bond for as low as one gramme and as much as 4kg. However, the maximum investment for trusts and similar businesses is 20kgs.
Individuals seeking low-risk investments might consider the sovereign gold bond schemes. The government has established a fixed fee for this particular package. As a result, everyone is entitled to a return on this investment. The current government rate is 2.50 per cent per year, with interest paid every six months (every six months). This interest rate may fluctuate based on government policy.
Soverign gold bonds have an 8-year lock-in period. The bonds, however, can be terminated or withdrawn prematurely after a 5-year lock-in period. The bonds are also available for sale on the secondary market at any time after maturity.
Capital gains, on the other hand, are taxed similarly to gold itself. Although interest is taxed when earned, it is not taxed when paid out or redeemed. Furthermore, there is no capital gains tax on investment income at maturity.
Certificates are used to store assets, which reduces the risks connected with real gold storage. These investments do not require any kind of storage or transit.
These bonds are low-risk investment options, making them suitable for persons with low-risk tolerance. SGBs also provide consistent income with interest payments twice a year. When compared to genuine gold, the cost of obtaining and selling bonds is lower.
Investing in the sovereign gold bond also relieves the stress of carefully keeping physical gold. Individuals who do not want to cope with such a bother may invest in them. There is no risk of theft because the bonds are held in a Demat account and on paper. Individuals seeking a long-term investment with significant returns may want to consider acquiring a gold bond.
You can consider investing in sovereign gold bonds if you’re also looking to diversify your portfolio. This compensates for your exposure to the stock market since gold tends to appreciate in value if there is a downturn in the stock market.
This scheme offers several advantages. The following are some of the most significant benefits of investing in a Sovereign Gold Bonds:
These bonds are a relatively safe investment scheme. However, they do have certain drawbacks.
Under the sovereign gold bond scheme structure, the bond has an eight-year maturity. The capital gain on the maturity amount is entirely tax-free; however, any sale before maturity is subject to capital gain taxes based on the holding period.
The profit is liable to capital gains tax if you sell a bond before it matures on the stock exchange. Long-term capital gains (LTCG) are profits held for more than three years. Resale before the completion of three years is considered a short-term capital gain and is taxed as per your tax slab. Long-term capital gains attract a flat 20% of your earnings after adjusting for inflation.
The yearly interest rate on these bonds is 2.5 per cent. It is given out every six months. This interest payment contains no tax deducted at source (TDS). It is added to your taxable income and taxed at the applicable tax rate.
Gold is a valued object with socioemotional significance, especially in India. It is the most sought-after asset that anybody would like to own. Physical gold carries its own set of hazards and expenses. The risk of theft and hefty storage expenses increases as the price of gold rises. As a result, sovereign gold bonds are more suitable alternatives for actual gold.
The danger of investing in them is largely minimised because they are issued in the form of certificates. While they are particularly appealing as an investment choice since they provide a fixed interest rate and no capital gains tax on redemption at maturity. If you are looking for more returns on your investments, the Fi app offers hassle-free investment in other avenues like mutual funds to help grow your money.
Government securities having gold as an underlying asset are known as SGBs. They serve as a substitute for genuine gold. Investors have to pay the issue price in cash, and the bonds will be repaid in cash on maturity.
Investing in SGBs is a better alternative than genuine gold since it avoids the risks and costs associated with physical gold. SGBs are stored in the RBI's records or in Demat form, eliminating the chance of loss, theft, or fraud.