As part of my financial planning, I had diligently allocated my investments, including SIPs, a portion in FDs, various mutual funds, and vigilant monitoring of IPOs for maximum returns. Just as I was feeling pleased with my prudence, I stumbled upon Sovereign Gold Bonds.
Introduced in November 2015, Sovereign Gold Bonds represent government securities denominated in grams of gold, offering an alternative to physical gold ownership. Issued by the RBI on behalf of the central government, SGBs aim to curtail the demand for physical gold and encourage savings. To delve deeper into the concept, we interviewed Chartered Accountant Abhay Asknani.
‘SGBs function as government securities, measured in grams of gold, serving as substitutes for possessing physical gold. Investors purchase these bonds at the issue price in cash and receive redemption in cash upon maturity. The issuance of these bonds is facilitated by the Reserve Bank on behalf of the Government of India.’, says Abhay.
The Sovereign Gold Bond Scheme's Series I and II were available for subscription from June 19-23 and September 11-15 respectively earlier this year, while Series IV is scheduled to be open for subscription from February 12-16, 2024.
How Does The Mechanism of SGBs Operate?
• Each SGB represents one gram of gold, with denominations available in one gram units or multiples thereof, meaning only whole units of SGBs can be bought.
• These bonds come with an eight-year maturity period, extendable by three years. If acquired directly from the government in the primary market, they can be sold back to the government from the fifth year onwards. In dematerialised form, they can be traded on the stock exchange at any time.
• They carry a fixed interest rate of 2.50 per cent per annum on the initial investment, paid semi-annually to the investor's bank account, with the final interest paid upon maturity along with the principal.
• Online purchasers of SGBs pay ₹50 less than the nominal value.
• Interest earned on SGBs is taxable. On the other hand, capital gains at maturity are not taxable, but are subject to taxation if sold before maturity.
How To Purchase Sovereign Gold Bonds Online?
Sovereign Gold Bonds (SGBs) are available for purchase from the secondary market at any time through the BSE or NSE. Opting for online acquisition of these bonds allows buyers to obtain them at a discounted rate of ₹50 below the nominal price.
Benefits Of Investing in Sovereign Gold Bonds
• Safety and security:
SGBs, being government-issued, offer a high level of security with no default risk. Moreover, investors need not worry about the physical storage and security concerns associated with owning gold.
• Convenience and accessibility:
Held in Demat form, SGBs are easy to buy, sell, and hold. Investors can bypass the challenges of purchasing, storing, and liquidating physical gold.
• Interest income:
SGBs provide a fixed interest rate on the initial investment, offering an additional source of income.
• Potential for capital appreciation:
Since SGBs are linked to the price of gold, investors stand to benefit from any uptick in gold prices during the investment period.
• Hedge against inflation:
Historically, gold has served as a hedge against inflation, preserving purchasing power.
• Tax advantages:
No capital gains tax is imposed if investors hold the bonds until maturity. In case of premature redemption, indexation benefits are available to mitigate tax liability.
Tax Implications of Investing in Sovereign Gold Bonds (SGBs)
• Liquidity and Tradeability:
SGBs can be traded on stock exchanges, providing liquidity to investors. Unlike physical gold, SGBs do not entail making charges, and their value remains unaffected by wear and tear.
Risks Associated With Investing in SGBs
• Fluctuations in gold prices: The value of SGBs is directly correlated with gold prices, which can experience significant fluctuations in the market. A decline in gold prices during the investment period may lead to a decrease in the value of SGBs.
• Interest rate risk: With a fixed interest rate, SGBs may face the risk of opportunity cost if interest rates rise substantially in the future. Higher interest rates can make alternative investments more attractive, potentially impacting the relative returns of SGBs.
• Early exit constraints:Selling SGBs before maturity may result in limited liquidity, as trading volume in the secondary market can be lower compared to other financial instruments. Premature redemption may incur potential losses based on the prevailing market price of gold.
• Regulatory changes: Government interventions, such as the introduction of new regulations or modifications to existing ones, can affect the terms, benefits, and taxation of SGBs. Changes in the frequency and availability of SGB tranches may also impact investment opportunities based on governmental decisions.
