In the ever-changing landscape of investment options, Sovereign Gold Bonds (SGB) have emerged as a secure and lucrative choice for investors. Introduced by the Government of India, SGBs provide individuals with an opportunity to invest in gold in a convenient and regulated manner. In this blog post, we will explore the features, benefits, and considerations associated with Sovereign Gold Bonds.
SGB is essentially an investment option, where the investor is lending money to the government for various purposes. The Reserve Bank of India (RBI) issues Sovereign Gold Bonds (SGBs) on behalf of the Government of India. Overall, SGBs help the government mobilize savings, reduce gold imports, raise capital, stabilize the gold market, promote financial inclusion, and provide a secure investment option for individuals. It is a way for the government to manage its fiscal requirements and promote the formalization of gold investments in the country.
Why invest in SGB?
- Safety and Security: SGBs are backed by the government, making them a safe and secure investment option. They eliminate the risk associated with storing physical gold and reduce the chances of theft or damage.
- Attractive Interest: One of the significant advantages of SGBs is the additional interest they offer. These bonds earn a fixed rate of interest annually, currently set at 2.5% per annum. This interest is added to the bondholder’s account on a semi-annual basis, providing an extra source of income.
- Capital Appreciation: Similar to physical gold, the value of SGBs is linked to the prevailing market price of gold. Therefore, as the price of gold appreciates over time, the value of your SGB investment may increase, allowing you to benefit from potential capital gains.
- Liquidity: SGBs are tradable on stock exchanges, providing investors with the flexibility to buy or sell their bonds before maturity. This feature enhances liquidity, allowing investors to exit their investments if required, based on prevailing market conditions.
- Tax Efficiency: SGBs offer certain tax benefits to investors. The interest earned on these bonds is taxable, but the capital gains arising at maturity are exempt from capital gains tax if held until maturity. Moreover, these bonds are eligible for indexation benefits if held for more than three years.
How is it different from Gold Mutual Funds and ETFs?
In the last blog, we discussed, Gold investing via Mutual Funds and ETFs. They all are investment options that provide exposure to gold. While they share the common objective of investing in gold, there are some key differences among them.
- Nature of Investment: SGBs are government-backed bonds that represent direct ownership of gold. Whereas, in the case of mutual funds pool money from multiple investors to invest in various gold-related instruments, including physical gold, gold mining stocks, and gold derivatives. Investors hold units in the mutual fund, representing proportionate ownership of the underlying gold investments and ETFs are exchange-traded funds that invest primarily in physical gold. Each unit of a gold ETF represents a certain amount of gold, typically 1 gram. Gold ETFs are traded on stock exchanges, and their prices are closely linked to the market price of gold.
- Mode of Investment: SGBs are issued in specific tranches by the government during specified periods. Investors need to apply for these bonds during the issuance period and hold them in dematerialized (electronic) form. Whereas for mutual funds, investors can invest in gold mutual funds by purchasing units directly from the mutual fund companies. These units can be bought or redeemed at the Net Asset Value (NAV) of the fund, which is calculated based on the value of the underlying gold investments. In, the case of ETFs, they can be bought directly from the stock exchange.
- Lock-In Period: SGBs have a maturity period of 8 years, whereas Mutual Funds and ETFs are devoid of any lock-in period.
- Expense Ratio: The expenses associated with investing in SGBs are relatively lower, as they primarily include insurance charges and custody charges. In the case of MFs and ETFs, each AMC has its expense ratio.
- Taxation: Interest earned on SGBs is taxable as per the individual’s income tax slab. However, capital gains arising from the redemption of SGBs at maturity are exempt from capital gains tax. On MFs and ETFs, tax charges are according to LTGs and STGs.
How to apply?
The government announces specific subscription periods for each series of SGBs. These dates may vary for each tranche. Investors need to be aware of the announced subscription period to apply for SGBs within the specified timeframe. It is advisable to refer to official sources, such as the RBI‘s website or notifications, for the most accurate and up-to-date information on important dates. Resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable institutions can apply for SGBs.
What are the charges for SGB?
When investing in Sovereign Gold Bonds (SGBs), there are certain fees, expenses, and costs to consider. It’s important to note that the fees, expenses, and costs associated with SGBs may vary and are subject to change over time. The specific charges applicable to your SGB investment may depend on factors such as the issuing institution, intermediary, and other service providers involved in the process.
Here are the key elements related to fees and expenses associated with SGBs:
- Issue Price: The issue price of SGBs is typically set higher than the nominal value of the gold contained in the bond. This difference between the issue price and the nominal value covers the expenses and costs incurred in issuing and administering the bonds.
- Brokerage Charges: If you apply for SGBs through a broker or intermediary, they may charge a brokerage fee for their services. The brokerage charges can vary depending on the broker and the services provided.
- Demat Account Charges: SGBs are issued and held in dematerialized (electronic) form. If you do not already have a demat account, you may need to open one with a depository participant. Opening and maintaining a demat account may involve charges such as account opening fees, annual maintenance charges, and transaction charges.
- GST: Goods and Services Tax (GST) is applicable to the purchase of SGBs. The current GST rate on the purchase of SGBs is 3% of the nominal value of the bonds.
- Custodian Charges: SGBs are stored and managed by custodians appointed by the Reserve Bank of India (RBI). The custodian charges fees for their services, which cover the safekeeping, storage, and management of the gold backing the bonds.
As of June 3, 2023, the following are the SGD fees and expenses for a typical investor:
- Transaction charges: There is no charge for opening or maintaining an SGB account. However, there is a transaction charge of Rs. 20 per transaction for all types of transactions, including deposits, withdrawals, and transfers.
- Service tax: There is a service tax of 15% on all charges levied by the RBI on SGBs.
- Fund management charges: The fund management company charges a fee of 0.05% per annum on the average daily balance of the SGB account.
- Exit load: There is no exit load on SGBs. However, if you redeem your SGBs within one year of purchase, you will be liable to pay a penalty of 1% of the amount redeemed.
Consideration points before investing
When considering investing in Sovereign Gold Bonds (SGBs), here are some important points to consider:
- Investment Objective: Clearly define your investment objective. Are you looking for exposure to gold as a long-term investment, diversification of your portfolio, or capital appreciation? Understanding your objective will help determine if SGBs align with your investment goals.
- Price and Market Factors: Keep an eye on the prevailing market price of gold and compare it with the issue price of the SGBs. Assess the market conditions, trend, and outlook for gold prices. This can help you make an informed decision about the potential returns and timing of your investment.
- Lock-in Period and Liquidity: SGBs have a lock-in period of eight years, with an exit option available from the fifth year onwards. Consider your liquidity needs and financial goals before committing to the lock-in period. Early redemption may be allowed under certain exceptional circumstances such as the death of the bondholder.
- Interest Income: SGBs offer an additional interest income on top of the potential capital appreciation. Evaluate the interest rate being offered and compare it with other fixed-income investment options available in the market. Assess whether the interest income aligns with your income requirements and expectations.
- Tax Implications: Understand the tax implications associated with investing in SGBs. While the interest income is taxable as per your income tax slab, the capital gains arising from the redemption of SGBs at maturity are exempt from capital gains tax. Evaluate the impact of taxation on your overall investment returns.
- Risk and Returns: Like any investment, SGBs carry certain risks. While they are backed by the government, the market price of gold can fluctuate, which may affect the value of your investment. Assess your risk tolerance and evaluate the potential returns of SGBs in relation to other investment options available in the market.
Sovereign Gold Bonds offer a unique investment avenue for individuals seeking exposure to gold. With their safety, attractive interest rates, potential capital appreciation, and tax benefits, SGBs provide a comprehensive investment proposition. SGB, offers capital appreciation and interest of 2.5% per annum, which is credited half yearly each year directly in the bennifeicries account and that’s what differentiates it from Gold MFs and ETFs.
It’s important to note that the fees, expenses, and costs associated with SGBs may vary and are subject to change over time. The specific charges applicable to your SGB investment may depend on factors such as the issuing institution, intermediary, and other service providers involved in the process.
However, investors should carefully evaluate their investment goals, risk appetite, and market conditions before venturing into SGBs. As with any investment, it is always advisable to consult with financial advisors and stay updated with the latest guidelines and regulations regarding SGBs.