With a plethora of investment options available today, gold still manages to find its way into your portfolio – whether knowingly or unknowingly. Some buy it for its sentimental value, and some because it provides a great ‘hedge’ during periods of macro and geo-political uncertainty. Whatever the reason may be, it is clear that gold is here to stay as an asset class for the foreseeable future.
Usually, investing in gold is associated with the tedious process of purchasing jewelry or gold bars with the added cost of making and storing them. But, what if we could invest in gold without having to physically hold it? That’s Sovereign Gold Bonds.
Sovereign Gold Bonds
Sovereign Gold Bonds (SGBs) were introduced as an alternative to physically holding this precious yellow metal in 2015 by the Reserve Bank of India to reduce the gold imports in India and also open an investment route for millennial investors.
SGBs are bonds issued by the Reserve Bank Of India under the Govt. of India that allow you to invest in gold (in grams) without the hassle of physically taking care of the purchased gold and take away the hassle of safekeeping it.
Features of Sovereign Gold Bonds
Eligibility: The bonds are allowed to be bought by Indian Residents, entities including HUFs, Trusts, Universities, and Charitable institutions.
Purchase criteria: You can buy SGBs in grams of gold and its multiples with the minimum size being 1 gram and the maximum being 4 kgs for individuals and HUFS and 20 kgs for trusts and similar entities listed by the government.
Interest: The investors will be paid Interest on your initial investment at the rate notified by RBI for a particular tranche on its launch and is paid semi-annually. For SBG 2022-2023 the investors will be paid a fixed interest of 2.50% per annum on the invested value, to be paid semi-annually
Disinvesting: The tenure for SGBs is 8 years with the eligibility to take out your investments from the 5th year i.e 5th, 6th, 7th, and 8th year of your investment on the interest payment dates.
Taxation: Under the Income Tax act of 1961, capital gains on Sovereign Gold Bonds are exempted. For long-term capital gain tax, the investor is provided with indexation benefits which are applicable when transferring SGBs as well.
Benefits of Sovereign Gold Bonds
Virtual: As you won’t be receiving any physical gold, it cuts out the need to store it and makes it hassle-free as you don’t need to take care of its safety.
Charges: There are no additional charges that you’d have to incur while investing in Sovereign Gold Bonds as compared to physical gold.
Safety: Since it is issued by the Reserve Bank of India, it is essentially a risk-free investment.
Collateral: SGBs can also be used as collateral for taking out loans in the form of gold loans with the value of gold being calculated after setting the Loan-To-Value ratio (LTV). As of now, only some banks provide this option.
Transferable: You are allowed to trade Sovereign Gold Bonds(SGBs) on the stock exchange after a certain period of time that you’ve invested in them.
Interest: Above all, unlike physical gold which just sits idle after the purchase and you’ve to wait for the asset’s value to increase, SGBs provide you with a regular side income in the form of interest.
Other Investment Routes
| Physical gold | Gold ETFs | SGBs | |
| Safety | Low (risk of theft) | High | High |
| Lock-in Period | No | No | Yes (8 years) |
| Return | Low (due to additional making and storage charges) | Low | High (with the added interest) |
| Storage | Need to safe keep | No need | No need |
| Collateral ability | Yes | No | Yes |
| Tax | LTCG after 3 years | LTCG after 3 years | LTCG after 3 years (capital gains exempted if redeemed after maturity) |
Conclusion
Although the investment returns of gold can be debated – what can not be debated is its importance as a store of value. And hence a small tactical allocation to gold in your investment portfolio through SGBs/Gold funds can provide an effective tool to ride out the volatility of the markets during periods of rising uncertainty and high inflation.
