Sovereign Gold Bond Scheme: Is it suitable for You?

Continuing with its issuance of sovereign gold bond (SGB) scheme, the RBI opened the window for next tranche of subscription from 17 -21 May 2021. These will allow investors to invest in gold in digital form with certificate issued against grams of gold. For individual investors, the minimum investment is equivalent to the price of 1 gram of gold and maximum investment is equal to the value of 4 kg of gold. A holding certificate is issued in the name of an investor upon successful purchase of the gold bond. You can also find the detailed schedule of subsequent issues below.

Let us examine the key features and its suitability:

  • Pricing: The SGBs will be issued to investors at Rs 4,777 per bond. Each bond tracks the price of one gram of gold. If the investor applies online and pays using digital modes, then he gets a discount of Rs.50 per bond. The value of SGBs is linked to fluctuation in gold prices, so these bonds will be transacted depending upon the prevailing prices of gold.
  • Periodic Interest Payout: This is the only gold product where investors can earn some interest income which is not the case with holding physical gold or even gold mutual funds/ETFs. In SGB, investors are paid interest on a half yearly basis at the rate of 2.5 per cent per annum. Although no TDS is applicable, this income is taxable.
  • Fixed Tenure: SGB has a tenure of eight years and has an exit option for investors after five years, on each interest payment date. Also, investors can sell their bonds in the secondary market at the prevailing rates of gold.
  • Early Exit option: As mentioned, another exit option for investors is that SGBs can be traded in the secondary market. This can be done after 14 days from the initial subscription date.  For transactions in the secondary market, an investor needs to choose the demat option at the time of primary issue of SGBs. Consequently, the digitised certificate is reflected in the demat account of the investor.
  • Taxation: If an investor holds SGB till maturity, the potential capital gains on the proceeds are tax free. However, any potential gains arising from premature withdrawal after 5 years or from selling in the secondary market is subject to taxation. Tax treatment is the same as for any gold product. Redemption before 3 years attracts short term capital gains tax which is applicable as per income tax slab. Exit after 3 years attracts long term capital gains tax applicable at 20 per cent after indexation.
  • Loan facility: SGBs are acceptable forms of collateral to avail loans.  Up to 75 per cent of the market value of such bonds can be availed as a loan from any scheduled financial institution.
  • Costs: While gold mutual funds roughly charge around 0.5 per cent management fees, SGBs have no cost associated with them.

SGBs are a convenient way to take exposure to gold as an asset class in digital form and eliminate the hassle and costs of physical storage. Gold can be an important diversifier in an investor’s portfolio as it has negative correlation with equity and debt. This implies that gold prices generally move in opposite direction compared to debt and equity. For e.g., last year in 2020 when stock markets crashed in March during lockdown period and interest rates fell during the year, gold prices went up. An investor can consider to have not more than 10 per cent exposure to gold in total portfolio. It is important to understand the key investing aspects of risk, returns, liquidity and taxation before parking money in SGBs. A long-term investor can also have a combination of SGBs and gold mutual funds in his portfolio.

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