Q. I am a 39-year-old feedstock trader, I and my family has been investing in gold coins and gold biscuits since ages. I recently learned from my acquaintances about sovereign gold bonds (“SGB”). Can you please explain the pros and cons of investing in SGB? Separately, can I buy SGBs from the secondary market, and if yes what things I should keep in mind if I am investing in SGBs in the secondary market?
Sovereign gold bonds are government securities denominated in grams of gold. They are issued by the Reserve Bank of India (RBI) on behalf of the Government of India (GOI). They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed on maturity in cash. The bond is issued for a period of eight years with an exit option after the fifth year. The bondholders also receive a fixed interest rate of 2.5% per annum payable semi-annually on the nominal value of the bond.
Why should one invest in sovereign gold bonds?
One should invest in sovereign gold bonds for the following reasons:
- They offer a safe and secure way to invest in gold without the risk of theft, loss, or impurity.
- They offer capital appreciation linked to the market price of gold.
- They offer a regular income through interest payments.
- They offer tax benefits such as exemption from capital gains tax on redemption, indexation benefit for long-term capital gains tax, and no TDS on interest payments.
- They offer easy liquidity through trading on stock exchanges or premature redemption after five years.
- They offer convenience of holding in demat or paper form.
What are the advantages and disadvantages of SGBs?
The advantages and disadvantages of sovereign gold bonds are as follows:
- They are backed by the sovereign guarantee of the GOI, making them low risk and credible.
- They have lower costs than physical gold as there are no making charges, storage charges, or GST involved.
- They have higher returns than physical gold as they earn interest income in addition to capital gains.
- They have lower volatility than physical gold as they are not affected by demand and supply factors or geopolitical events.
- They have higher transparency than physical gold as they are issued by RBI and their price is fixed based on the simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited for the last three working days of the week preceding the subscription period.
- They have lower liquidity than physical gold as they have a lock-in period of five years and limited trading volume on stock exchanges.
- They have lower flexibility than physical gold as they have a fixed tenure of eight years and fixed interest rate of 2.5% per annum.
- They have lower utility than physical gold as they cannot be used for jewellery or gifting purposes.
How are SGBs taxed?
The taxation of sovereign gold bonds is as follows:
- The interest income from SGBs is taxable as per the income tax slab rate of the bondholder.
- The capital gains arising from redemption of SGBs on maturity are exempt from tax.
- The capital gains arising from transfer of SGBs before maturity are taxable. However, the bondholder can avail indexation benefit to reduce the tax liability.
- There is no TDS applicable on interest payments or redemption proceeds from SGBs.
Who should invest in SGBs?
Sovereign gold bonds are suitable for investors who want to diversify their portfolio with at least 5%-10% in gold. They are ideal for investors who have a low-risk appetite and a long-term horizon. They are also beneficial for investors who want to avoid the hassles of storing and maintaining physical gold. However, they are not suitable for investors who need high liquidity or flexibility or who want to use gold for jewellery purpose.
SGB scheme 2023-24
The SGB scheme 2023-24 will have two tranches in the first half of the financial year. The first tranche will open for subscription from June 19 to June 23, 2023, and the second tranche will be available from September 11 to September 15, 2023.
The issue price for the first tranche has been fixed at ₹5,926 per gram of gold, with a discount of ₹50 for online subscribers who pay through digital mode. The settlement date for the first tranche is June 27, 2023.
Things to keep in mind while investing in SGB in the secondary market
SGBs can also be purchased from the secondary market (stock market). You should, however, keep in mind the following things while investing in SGBs.
- Compare the prices of different SGBs series on stock exchanges and choose the ones that offer the best discount to the spot price of gold. The discount may vary depending on the trading volume, demand and supply, and residual maturity of the bonds.
- Check the interest payment dates and accrued interest of the SGBs you are interested in. SGBs pay a fixed interest of 2.5% per annum on the face value (issue price) of the bonds, which is taxable as per your income tax slab. The interest is paid every six months and is not affected by the purchase price in the secondary market.
- Consider the tax implications of buying and selling SGBs in the secondary market. The capital gains from selling SGBs before maturity are taxable as per your income tax slab. However, if you hold them till maturity, the capital gains are exempt from tax. You can also avail indexation benefit if you sell them after three years from the date of purchase.
- Be aware of the liquidity and exit options of SGBs in the secondary market. SGBs have a tenure of eight years, with an option to redeem them after five years on interest payment dates. However, if you want to exit before that, you have to rely on the secondary market, which may not have enough buyers or sellers at any given time. You may also have to sell them at a loss if the market price is lower than your purchase price.
SGB are an optimal option for investors looking to benefit from the popularity of gold as a reliable investment option. Not only they offer you the convenience of holding the bonds in electronic form, they are also tax optimized. Overall there are multiple advantages of investing in SGB over investing in physical gold.
Kuvera is a free direct mutual fund investing platform.
Note: This is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.