Sovereign Gold Bonds (SGBs) are government securities designated in the form of gold with a basic unit of 1 gram. The Reserve Bank of India issues sovereign gold bonds on behalf of the central government in compliance with the Government Security Act of 2006. They are considered as an alternative to holding physical gold.

Who can invest?

Individuals who are Indian residents as defined by the Foreign Exchange Management Act of 1999 are eligible to invest in SGB. Trusts, individuals, charitable institutions, HUFs, universities, are eligible investors. 

Individual investors who change their residency status from resident to non-resident may keep their SGB until they are redeemed or matured.

The interest earned on bonds is taxed according to the Income Tax Act, 1961.

Risk Associated

Sovereign gold bonds are one of the safest investments in India because there is no possibility of default on repayment since they have backing from the government. 

Any risk connected with such investments can be traced back to market changes, which cause gold prices to fluctuate. Since gold prices are less vulnerable to market changes, hence Sovereign Gold Bonds are considered safer investment for individual investors.

Since the investor stands to receive the current market price at the time of redemption/premature withdrawal, the amount of gold for which he paid is safeguarded. 

Investors are guaranteed the market value of gold at maturity as well as periodic interest. SGBs have an advantage over physical gold as it eliminates the risk of storage and purity and extra expenses such as making charges.

Investment and Returns

The minimum investment in the bond is one gram, with a maximum subscription limit of four kilograms for individuals, four kilograms for Hindu Undivided Families (HUF), and twenty kilograms for trusts and similar institutions as determined by the government. 

The maturity period of SGBs is eight years where the premature withdrawal is allowed after five years. The interest at the rate of 2.5 percent per annum is paid to the investors after every six months.

Individuals can also sell their bonds in the secondary market for the current gold market pricing, after 14 days from the original subscription date.

Changes in the latest allocation of SGBs

In the fourth tranche of the Sovereign Gold Bond Scheme 2021-2022, investors who carried out the process of registration and payment online were offered a small discount. It can be expected that this minor incentive would continue in future schemes as well.

Overall, Sovereign Gold Bonds are believed to be a good investment option and an alternative to physical gold as it carries less risk. It is an easily transferable security, hence it does not bind the investor for a long period of time.