The Government of India first issued sovereign gold bonds in 2015 as part of the Gold Monetization Scheme. The Reserve Bank of India offers bond offerings in tranches on behalf of the government under this arrangement.
These bonds are an excellent alternative to investing in gold in its physical form. This investment option appeals to investors primarily because of the possibility of price appreciation in gold.
Sovereign gold bond pay a fixed interest rate of 2.5 percent on the amount deposited every two years.
Here are some key points to consider for first-time investors interested in learning more about sovereign gold bonds.
What are Sovereign Gold Bonds?
The demand for actual gold has dropped significantly in the Indian market. According to figures, India’s gold demand is believed to have plummeted by 35.34 percent in 2020 alone. The Government of India launched the Sovereign Gold Bond (SGB) Scheme to provide an alternative to actual gold, and these fall under the debt fund umbrella.
Sovereign gold bonds are certificates issued by the Reserve Bank of India in exchange for gold grams. Individuals can invest in gold without having to worry about keeping actual gold safe.
Sovereign gold bonds are a safe investment option because market changes do not affect gold prices. Because of the popularity and demand for gold, which leads to considerable price growth over time, they are regarded as potential investment options.
The value of the SGB is expressed in multiples of gold grams. Because the RBI issues these bonds under the Government of India stock umbrella, there is a pre-determined subscription window.
RBI issues a sovereign gold bond plan in tranches during this time period. Every 2-3 months, the RBI issues a press statement announcing the issuance of new sovereign bonds, and it offers a week-long window for investors to enroll in the scheme.
Who should invest in SGBs?
Sovereign Gold Bonds are a good option for investors wishing to diversify their portfolios with gold exposure. This is a good investment for investors with a low-risk appetite because it is a low-risk investment.
It also pays a semi-annual fixed income. SGB purchase/sale costs are modest compared to actual gold. Thus, investors don’t have to spend a lot of money on this investment.
Investors who prefer to avoid the hassle of storing actual gold can access it in the Demat form, which is a convenient option for those who don’t want to keep genuine gold in the vault.
Why should you invest in SGBs?
Investing in sovereign gold bonds has a number of advantages. The following are some of the most compelling reasons to invest in gold bonds:
- These bonds can be used as collateral for loans by investors.
- The issuance price of sovereign gold bonds attracts a set annual interest rate of 2.5 percent.
- The payment for these bonds can be made in cash. It is permitted up to a total of Rs. 20,000. Alternatively, investors can pay via demand draught, check, or e-banking.
- DEMAT can also be created from these linkages.
- Because gold bonds are issued as Government of India stock, they provide security.
- After the specified time period, which is approximately five years from the investment time, they can be traded on a stock exchange through any trading app.
What are the tax rules for sovereign gold bonds?
The following two types of returns on sovereign gold bonds can be roughly classified:
- At the time of a bond’s maturity, capital gains are earned.
- Interest is paid out every two years.
Investors who keep the bond for the whole period are exempt from paying long-term capital gains tax.
On the other hand, interest income is taxable as ‘Income from other sources,’ and the respective income tax slabs determine the applicable tax rates for the ﬁnancial year.
If investors resell these bonds in the secondary market, they must pay tax on any realized capital gains. Short-term capital gains tax on total profits applies if these bonds are resold within three years of the investment date.
The annual income of the investors determines the tax rates that apply. Long-term capital gains are subject to a 20% tax rate on total earnings after indexation is taken into account.
Investors can consider purchasing sovereign bonds after carefully analyzing personal financial goals and investment tenure. This is due to the fact that sovereign gold bonds require a significant investment, which is locked in until the investor is able to realize future profits. To properly subscribe to sovereign gold bond offerings, investors must visit the RBI’s website on a regular basis.