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What is the Sovereign Gold Bond Scheme? How does it Work?

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What is the Sovereign Gold Bond Scheme? How does it Work?

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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?

What is the sovereign gold bond scheme?

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.

What interest rates are linked with the sovereign gold bond?

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.

How does the sovereign gold bond function?

  • Throughout the fiscal year, the RBI issues SGBs in several tranches. Banks, brokers, post offices, and internet platforms all sell these securities. To encourage investors to buy SGBs online, a discount of INR 50 per gramme is offered. It is worth noting that the RBI often issues a new series of SGBs into the market. So, if you missed the last one, there's always the next one to look forward to.
  • Bonds are available in physical and dematerialised forms. By making a particular request after acquiring these bonds in person, investors can have them credited to their Demat accounts. The RBI then dematerialises the bonds and determines how long they will be retained in their archives.
  • After allocation, dematerialisation is also an option. Investors who do not want to buy from the RBI directly can do so through the secondary market, which includes stock exchanges.
  • You will immediately be assigned an application number when you apply for a sovereign gold bond. Furthermore, all gold bond investors receive certificates from the RBI. The bank is in charge of delivering the certificate. Note that certificate issuing takes typically 15-30 days following the application approval.

How can a sovereign gold bond be redeemed?

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.

Who should invest in the sovereign gold bond?

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.

What are the main benefits of the sovereign gold bond scheme?

This scheme offers several advantages. The following are some of the most significant benefits of investing in a Sovereign Gold Bonds:

  • These bonds can also be used as loan collateral. You can trade these bonds if you wish to exit the market early.
  • The bond's tenure is eight years. However, there is an opportunity to exit after the fifth year.
  • The most significant benefit is that they are backed by a sovereign guarantee, not just on the interest earned, but also on the money invested.

What are the risks associated with an investment in a sovereign gold bond?

These bonds are a relatively safe investment scheme. However, they do have certain drawbacks.

  • As mentioned earlier, in the event of a market downturn, gold prices go up. The inverse is also true. So, if you have invested only in SGBs then this might not be favourable for you since the demand for gold will fall.
  • Any currency fluctuations also have an impact on the price of gold. Any appreciation in the US dollar cause the price of gold to falter due to the inflation rates. This results in increase cost in imports which reduces the investment capability, thereby affecting the demand for gold.

How does taxation on the sovereign gold bond scheme work?

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.

Summing it up

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. 

Frequently asked questions:

What is a sovereign gold bond?

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.

Is a sovereign gold bond scheme a good investment?

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.

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