Sovereign Gold Bond: Meaning, How it works, Interest rate, Taxation

Gold has been the preferred form of investment for Indians for centuries. It is the most commonly bought asset on all festive occasions, be it wedding, anniversary or birthday. But when you buy gold jewellery, you pay a lot of making charges and have to keep the jewellery safe. SGBs (Sovereign Gold Bonds) are the perfect substitute for investing in gold. The article explains everything you need to know about SGBs, the key features, the returns, the tax implications, who should invest in SGBs and the pros and cons of investing in SGBs.

First, let’s understand what SGB means?

What is Sovereign Gold Bond or SGB?

SGBs (Sovereign Gold Bonds) are government securities denominated in gold. They were introduced in 2015 as part of the Gold Monetization Scheme. The RBI issues SGBs in tranches on behalf of the Indian government.

SGBs are denominated in multiples of grams, so you can buy at least 1 gram of gold. The price you pay for the quantity of gold you buy is protected by the government and when you redeem it, you get the market price of the gold. This makes SGBs a safe way to invest in gold, as you do not have to worry about the safety of physical gold.

Features of Sovereign Gold Bond

Let’s look at some of the important features of SGBs;

• The RBI issues SGBs under the Government Security Act, 2006, in consultation with the Government.
• Since gold bonds are denominated in multiples of grams, you can buy minimum 1 gram of gold or a multiple thereof.
• SGBs carry a fixed coupon rate for interest payment. The government offers 2.5% interest per annum, which is paid half-yearly. Interest on SGB is credited to your bank account.
• Sovereign gold bonds are backed by the government, so you don't have to worry about defaulting on interest payments or the purity of the gold.
• You do not need to store physical gold, as gold bonds are issued in the form of certificates. You can store these certificates safely in your demat account.
• SGBs have a fixed maturity term of 8 years. Your investment in an SGB is therefore tied up for 8 years. However, early withdrawal is also possible after 5 years.
• Individuals and HUFs (Hindu Undivided Families) can buy a maximum of 4 kg of gold, while companies and trusts can subscribe to a maximum of 20 kg.
• An individual resident in India, HUFs, charitable institutions, and trusts are eligible to invest in SGBs.

How Sovereign Gold Bonds Work?

As mentioned above, SGBs are expressed in grams of gold, with each government bond equivalent to 1 gram of gold price. If the price of gold fluctuates, the value of the bond rises or falls accordingly.

Unlike investing in physical gold, investing in SGBs also pays a fixed interest of 2.50% per annum. When you invest in physical assets, you only receive the capital gain, but with SGBs you receive interest every six months, making them an attractive investment option.

The capital invested in SGBs has a lock-in period of 8 years and at maturity you get the market price of gold. At maturity, the redemption price is calculated based on the simple average of the closing price of 999 purity gold for the last three working days, published by IBJA (Indian Bullion and Jewelers Association)

You can also opt for early withdrawal if you have reached the minimum holding period of 5 years. Thus, early withdrawal is possible in the 5th, 6th and 7th year and the withdrawal will be processed on the interest distribution dates.

Sovereign Gold Bond Interest Rate

SGBs offers a regular income at a fixed interest rate, which is currently 2.50% per annum. The interest rate remains fixed for the entire term of 8 years.

If you invest in Gold Bonds, you will receive a fixed interest payout of 2.5% p.a. The interest is paid out every 6 months and credited to your bank account.

Sovereign Gold Bond Returns

If you prefer to buy gold jewelry, you will only get capital gains on it. However, if you buy government gold bonds, you get two types of returns: Interest and capital gains.

As mentioned earlier, you will receive regular semi-annual interest of 2.5% p.a. on the original amount invested. The interest rate is known in advance and remains fixed for the entire term.

Suppose you have purchased 10 grams or 10 units of SGB 2023-24 Series II at an issue price of Rs 5,923. So your total investment is Rs 59,230 and you will receive interest of Rs 1,480.75 every year, paid in two installments of Rs 740.375. The interest is credited directly to your bank account.

In addition, you will receive capital gains based on the market price of gold at the time of redemption or maturity.

Suppose you bought Series I Gold Bonds of 2016 when the price of 1 gram of gold was 2,600 rupees. In 2024, at maturity, the price of gold rises to 6,213 rupees, giving you a capital gain of 3613 rupees per gram. In conclusion, you get a return of 140% without taking into account the interest income.

Sovereign Gold Bond Redemption

Redemption on maturity after 8 years

The NCDs will mature after 8 years from the date of issue of the gold bonds and now you can redeem or sell your investment. Redemption will be processed in Indian rupees at the prevailing market price of gold.

The simple average of the last three days closing price of 999 gold published by the IBJA is used to calculate the redemption price of the SGB.

On maturity, both the interest and the redemption amount are credited to the investor’s bank account.

Premature withdrawal after 5 years

Can I sell bonds after 5 years? Yes!

Although the bonds only mature after 8 years, early redemption or early withdrawal is possible from the 5th year after issue. You can redeem bonds in the 5th, 6th and 7th year and such redemption requests will be processed on the next interest payment date.

Bonds are also a tradable instrument on the stock exchange. If you hold government bonds in demat form, you can sell them on the stock exchange even before they mature. Resale of bond certificates on the stock exchange before maturity is subject to capital gains tax.

Taxation on investment in SGBs

Are SGBs tax-free? No, let’s understand how SGBs are taxed?

SGBs offer two types of returns: firstly, capital gains, which are generated by changes in the price of gold, and secondly, regular interest payments, which are made every 6 months.

If you hold SGBs for their entire term and sell them at maturity after 8 years, no capital gains tax will be charged. However, if you resell the bonds on the secondary market before 3 years, you will have to pay short-term capital gains tax at the income tax rate. When reselling gold bonds after 3 years, a long-term capital gains tax of 20% with indexation benefits is levied.

Interest from SGBs is not tax-free as it is added to income from other sources and taxed at the investor's applicable tax rate.

Advantages of SGBs

• Sovereign gold bonds are guaranteed by the government, making them the safest investment option with no risk of default of payment.
• Hassle-free investment as you can invest in SGBs online and hold certificates digitally in your demat account.
• Guaranteed interest income: With Sovereign Gold Schemes, you get a guaranteed interest payment of 2.5% per annum, paid every 6 months.
• Capital gains you receive on maturity on SGB are tax free.
• No expense for the safe storage of physical gold.
• Gold bonds can be used as collateral for loans. You can receive a gold loan of upto 75% of the market value of the bond.

Disadvantages of SGBs

• The SGB has a long maturity of 8 years, and for this reason many investors prefer to buy physical gold.
• The prices of the bonds are directly related to the gold prices on the market; if the gold price falls, the value of the bonds will also fall. If the purchase price of the gold bond is higher than the price at redemption or maturity, this will result in a loss of capital.

Who should invest in SGBs?

People with a low risk tolerance who prefer to invest their money in gold can invest in sovereign gold bonds. Gold is considered one of the safest instruments and SGBs are the best alternative for investing in physical gold.

Unlike buying physical gold, which only offers you capital gains, SGBs offer the double benefit of capital gains along with regular interest payments. As these bonds are also backed by a government guarantee, there is no risk that the interest will not be paid. This means you can earn substantial returns with SGB investments if you stay invested until maturity.

People who invest in the stock market but want to diversify their portfolio should also invest in gold bonds. During a market downturn, gold performs well, so SGB investments better manage the overall risk of your portfolio.

Before investing, you need to be aware that all the money invested will be locked in for at least 5 years. After that, you can opt for early withdrawal or stay invested for a term of 8 years.

Sovereign Gold Bond Apply Online

Can I buy SGB online? Yes, you can buy Sovereign Gold Bonds online.

Investors can apply for SGBs online with any scheduled commercial bank and payment is made digitally.

The most important benefit of investing in SGB online is that you get a retail discount of Rs 50 per gram. So you pay Rs 50 per gram less than the issue price of the bond.

Here's how you can buy gold bonds online;

1. Log in to your net banking account.
2. Search for SGB investment option.
3. Fill out the form such as quantity of gold you want to purchase (minimum 1 gram maximum 4 kg).
4. Accept the terms & conditions.
5. Recheck all the details and submit the order.