Sovereign gold bonds (SGBs) remain the best way to take exposure to gold, a recent report by brokerage house ICICI Direct Research suggested. This is due to an additional 2.5 percent per annum interest and no capital gains tax.
The report further noted that sovereign gold bonds have gained significant prominence in the last few years as investors gained confidence in the ease of investing and additional interest that they offer. So far, the Government of India through the Reserve Bank of India (RBI) has issued 62 tranches and raised around ₹43,000 crore, it informed.
There are no annual recurring expenses while capital gains arising on redemption of the sovereign gold bond scheme are exempt from tax. However, if these bonds are sold in the secondary market before maturity, capital gains arising on such transactions will be taxed at 20 percent with indexation if sold on or after three years and would be subject to marginal tax rate if sold before three years, explained ICICI Direct.
Also, a discount of ₹50/gram is available for investors applying online and making payments using digital modes for buying SGBs.
Investors get additional interest at the rate of 2.50 percent per annum on the nominal amount. Moreover, they continue to have full exposure to gold prices to the extent of the amount deposited, highlighted the brokerage.
Outlook remains positive
Gold prices have largely been on an uptrend since November 2022 globally amid moderating US retail inflation numbers and anticipation of a less aggressive US Federal Reserve. Further, the US dollar as well as US bond yields have begun to cool off, which has been supporting gold, observed the brokerage.
Gold prices are up 13 percent in the last four months, both globally as well as in India. Domestically, it is up 28 percent in the last two years (13 percent CAGR) and 78 percent in the last four years (15.5 percent CAGR), ICICI Direct pointed out. The historical long-term return of Indian gold is around 10 percent per annum. The recent return in gold is higher than the long-term average and, therefore, mean reversion may lead to moderation (lower than the long-term average return of 10 percent per annum) in return in the near term, forecasted ICICI Direct.
Allocation strategy
While the future outlook matters the most, historical return also gives an idea of whether to be ‘overweight’ or ‘underweight’ on an asset class.
“Whenever any asset class had done well (higher return than long term average), it is generally not a time to be overweight. Investors could be either underweight or equal weight based on future outlook. Currently, it is time to be equalweight in the overall asset allocation as while the historical return is higher, the outlook stays positive given we are at the fag-end of the interest rate hike cycle, particularly in the US. While inflation concern globally has moderated, it still remains far above desired levels (US average inflation for CY23 is expected at 3 percent while the US Fed target is 2 percent). Generally, we recommend 5-15 percent as the normal range of allocation to gold. Hence, investors may maintain around 10 percent allocation to gold,” it advised.
Among gold investments, the brokerage recommended SGBs due to the following reasons: 1) Additional interest of 2.5 percent, 2) No capital gains tax, 3) No management expenses, and 4) Issued by RBI on behalf of the government.
The Sovereign Gold Bond (SGB) 2022-23 – Series IV Program opened for subscription on March 06, 2023, and ends today. The price of SGB has been fixed at ₹5,611 per gram or unit of gold. The government is offering a rebate of ₹50 per gram to those who apply online and pay digitally, and the issue price of SGB is set at ₹5,561 per gram for such investors.
Every SGB is equivalent to 99.9 percent pure gold. Investing in an SGB frees investors from pertinent issues including gold purity, making charges, etc. These bonds are considered alternatives to physical gold as they do not contain impurities. Since these bonds are issued by the RBI, the risk of default is “Nil”.
By default, the lock-in period in these bonds is eight years. Meanwhile, the government allows investors to prematurely redeem their investments after five years. The capital gains tax is not applicable on the maturity amount post eight years, however, is applicable on the premature redemption amount.
