Bonds

SOVEREIGN GOLD BONDS

What are Sovereign Gold Bonds?
- Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for holding physical gold.
- SGBs are issued in multiples of one gram of gold where the investors will obtain a holding certificate for it. Also, they are easily convertible into demat form.
Who issues these Bonds?
- The Bond is issued by Reserve Bank on behalf of the Government of India and they are tradable on Stock exchange.
Features of Sovereign Gold Bonds
- Eligibility Criteria
  SGBs are eligible to issue to any Indian resident such as individuals, HUFs, trusts, charitable institutions, and universities. Individuals can also invest on behalf of a minor.
- Free from storage risk and cost
  It eliminates storage risk and cost. They are free from making charges and fear of impurities.
- Maximum Investment
  An individual investor(trust) can buy 4 kg (20kg) of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis.
- Tenure
  SGBs have a maturity period of 8 years. However, the investor can exit the bond from the 5th year(only on the date of interest payout).
- Tenure
  SGBs have a maturity period of 8 years. However, the investor can exit the bond from the 5th year(only on the date of interest payout).
- Interest Rate
  The applicable interest rate for SGB currently is 2.50% per annum on your initial investment. The interest payments are paid semi-annually i.e. twice a year. However, the returns are associated with the current market price of gold.
- KYC Documentation
  You must adhere to the norms of KYC(Know-your-customer) when you purchase physical gold. The KYC details must get completed upon submitting the identity proof copies such as PAN Card and address proof such as driving license, passport, Voters ID card for verification purposes.
- Tax Treatment
  The taxation for Sovereign Gold Bonds is upon interest applicable as per the provisions of the Income Tax Act, 1961. In the context of SGB redemption, the capital gains tax levied on an individual is exempted. Also, long-term capital gains attract indexation benefits to an investor or when the bond is transferred from one person to another.
- Statutory Liquidity Ratio Eligibility
  If banks have procured bonds after undertaking the procedure of invoking lien, pledging, or hypothecation, then they are eligible for statutory liquidity ratio. Normally, the commercial banks maintain capital in the form of gold, cash, approved securities before giving credit to the customers which are known as statutory liquidity ratio.
- Redemption Price
  The redemption price must be in rupees, subject to an average of the closing price of gold (which determines 999 purity) in the previous three working days.
- Sales Channel
  The bonds are sold off by the government through banks, Stock Holding Corporation of India Limited (SHCIL), and stipulated post offices as informed. The SGBs are traded via recognised stock exchanges such as BSE or NSE directly or through intermediaries.
- Commission
  1% of the total subscription amount is levied by the receiving offices as commission for the bond’s distribution. From this commission, they will share half amount with the intermediaries such as brokers or agents.

Advantages of Sovereign Gold Bonds

Complete Safety

Sovereign Gold Bonds don’t pose any risks that are related to physical gold, except the market risks. There are no such heavy designing charges levied therein. Furthermore, the interest can be earned on sovereign gold bonds, unlike physical gold which usually lies as an idle investment.

Additional Income

You can earn an assured annual interest at the rate of 2.50% on the issue price which determines the latest fixed rate.

Indexation Benefit

Long-term capital gains accrue when investors transfer bonds which are eligible for indexation benefits. There is also a sovereign guarantee on the principal along with the earned interest

Collateral

Sovereign gold bonds are accepted by some banks as a means of collateral security against loans pledged in Demat form. However, it will have a preference like a gold loan after adjusting the loan-to-value(LTV) ratio to the value of gold. The India Bullion and Jewellers Association Limited ascertain this.

Tradability

Sovereign gold bonds are traded on stock exchanges within a specified date and that is done as per the discretion of the issuer. For example, after 5 years of completion, SGBs can be traded on BSE or NSE, like others.

Who should invest in SGBs?
- SGBs are preferred by low-risk taking investors who want to diversify their portfolio with at least 5-10% in gold.
- The buying and selling expenses in the SGB is also nominal as compared to the physical gold.
- Those investors who do not want to go through the fuss of storing physical gold can also choose SGBs. Simply because, it is easier to store in the Demat form, and it cannot be stolen as they are held in electronic form.