There are many different types of investors, and people are constantly looking for strategies to diversify their investment portfolios. Some investors follow the norm and seek security. Others may want to balance safe investments with returns that are reasonable. Some people might even have the guts to gamble with stocks. Sovereign gold bonds can be used to aid with wealth allocation for people looking to establish a balance between safety and respectable returns. Here, we will discuss the benefits of investing in Sovereign gold bonds.
Sovereign Gold Bonds (SGB), which are backed by the Indian government, has become a legitimate investment choice for private investors as of late 2015. The purpose of the Gold Bonds was to enable investors to follow changes in gold prices without having to deal with the complexities of purchasing and selling physical gold. Here, we will explore the benefits of investing in Sovereign gold bonds in detail.
Table of Contents
What are Sovereign Gold Bonds?
You should understand what SGBs are before making an investment in them. The Sovereign Gold Bond Scheme of the Government of India is represented by sovereign gold bonds, often known as sovereign gold bonds. The Reserve Bank of India makes SGBs, which were introduced at the end of 2015 under the auspices of the Gold Monetisation Scheme, available in tranches at particular times of the year. Press releases are used to publicise sovereign gold bonds in newspapers during the times when the Reserve Bank of India makes them accessible for purchase by individuals.
Your bank, though, might already be aware of this. When you are familiar with SGBs, you might think of them as wise financial investments. You’ll also see the benefits of investing in Sovereign gold bonds.
Features of Sovereign Gold Bonds
The following SGB characteristics and advantages will help you decide whether to invest in the same:
As part of a subscription, investors can purchase sovereign gold bonds, which are made of 24-karat gold. Bonds are distributed in grammes of value per unit. One gramme of gold is the lowest unit of value.
Interest is paid out every six months at a fixed annual interest rate of 2.5 per cent.
Bonds are purchased with a set duration. It’s been 8 years. Investors may, however, choose to leave the programme after five, six, or seven years. Only on the days that interest is paid out is this permitted.
A minimum of one gramme and a maximum of four kilogrammes of gold can be invested in.
Joint holdings are an investment option for sovereign gold bonds.
Bonds can be bought by investors with cash (up to a maximum value of Rs. 20,000), checks, or demand draughts.
In India, there are specified banks and post offices where investors can obtain subscription forms and submit applications for Sovereign Gold Bonds. Certain banks, like SBI, allow investors to subscribe at their local branches.
Benefits of Investing in Sovereign Gold Bonds
Other types of gold investments do not have some of the unique advantages that sovereign gold bonds provide. Here, we will discuss the benefits of investing in Sovereign gold bonds detail:
Though you might not be able to invest in sovereign gold bonds through brokers, you can register a Demat account with knowledgeable brokers to keep your bonds safe.
Holding gold in the form of sovereign bonds is far wiser than doing so in the form of real gold. Every time you alter the form of gold while buying and selling jewellery, there is a loss in manufacturing charges of between 15% and 20%. you can keep the Gold in the form of coins or gold bars. However, you have to pay the costs associated with storing, insuring, and maintaining actual gold. You can keep the SGBs in your Demat account or even as physical certificates. In SGBs, you can avoid the problems of gold maintenance and translation loss substantially.
Even though gold ETFs are safe in Demat form, you have to pay the costs associated with doing so. A transaction fee applies each time you enter and exit a gold ETF. You can purchase Gold ETFs at the current unit price of gold units. they deduct the annual AMC fee of 1% from the NAV of your gold ETF. SGBs, on the other hand, do not carry any such costs. On the contrary, the government typically issues these gold bonds at a discount to the average market price, providing an additional benefit.
Get More Interest
From the standpoint of the investor, this is a fairly crucial element. There is no consistent income that you receive whether you own gold in physical or ETF form. Only a rise in the market price of gold can benefit you. The SGB, on the other hand, offers investors an annual interest rate of 2.50%. Although the interest rate has decreased from the former payment of 2.75%, this is still a smart option to use your unused gold assets. At least you receive a portion of the annual inflation risk compensation.
In the meantime, if gold prices increase, you will still benefit from the increase in value. Due to the government of India’s assurance of principal repayment and interest payments, these bonds are also secure from default risk.
It’s crucial to keep in mind that Sovereign Gold Bonds are generally more tax efficient than real gold. Let’s examine SGBs’ capital gains tax implications. Since gold is a non-financial asset, the holding term requirement for capital gains in this situation is three years. You must pay short-term capital gains tax at your personal peak rate if you sell your gold within three years of purchasing it.
Gold is a long-term capital gain if you sell it after three years. It will either be subject to a 10% tax rate without indexation or a 20% tax rate with indexation. In the event of SGBs, the investor will be completely tax-free upon redeeming their gold bonds. (Gold bonds have an 8-year lifespan and you can redeem after 5 years.) SBGs will, however, generate capital gains at the current rates if you will sell this on the secondary market. Interest on SGBs is taxable at your appropriate tax rate just like regular interest receipts.
Points to Consider Before Investing in Sovereign Gold Bonds
SGBs provide a more effective, profitable, and affordable way to hold gold than real gold does. SGBs have the advantage of a government guarantee in addition to being a profitable asset that earns interest.
When there is economic turbulence, geopolitical unpredictability, or a decline in the value of fiat currencies, gold typically outperforms other asset classes. At this time, we can see glimpses of all three in the world economy. One only needs to consider North Korea, Syria, Afghanistan, and the current political climate in Europe. In these unsettling times, gold is a safe-haven investment and is therefore in high demand. This is something an investor must have in mind.
Any choice to invest in gold in the context of your total portfolio structure and long-term objectives after consideration. For your portfolio to have a safety net in uncertain times, an exposure of 8–12% to gold is usually ideal. One must keep in mind, nevertheless, that, unlike the equities market, gold does not generate wealth over the long term. That should be the overriding consideration that eventually guides your gold investing choice.
How to Invest in Sovereign Gold Bonds?
At any approved bank, such as SBI and HDFC Bank, you can easily invest in sovereign gold bonds. You can submit an application for the same on the bank’s website under the “Investment” tab. There will be a menu-driven process unique to each bank, but the general procedures are the same. If you want to apply in person, gather subscription forms and deliver them to the appropriate banks along with your payment. You will need your PAN or Aadhaar cards in order to apply only after the validation of your KYC information and after you are granted the bonds.
There are two alternatives available to you if you want to invest in sovereign gold bonds. You might either submit an application for a new issue or purchase them on the secondary market on a trading website.
If you’re eager to purchase an original issue, keep in mind that they might not always be accessible. Typically, they offer a tranche of sovereign gold bonds for one week per month. They issue these bonds in tranches. Therefore, you must ascertain the date of the upcoming tranche and then prepare to make an investment.
However, you may always buy from the secondary bond market on a trading platform if you need to acquire it quickly. Please keep in mind, that you will have to accept the numbers you will get. They might not be in the numbers you require. Additionally, the lots that are for sale on the secondary market may have quite varying maturity dates.
Keep in mind that if you invest in the secondary market, you can obtain a great deal on the price because some existing or former SGB holders can sell their holdings. Additionally, it is acceptable if you intend to hold your investment until it matures.
If you don’t want that, you should be aware that if you decide to sell your SGB position in the secondary market, you might have to settle for a lower price and occasionally, you might have to wait a few days before a buyer shows up. However, a Demat account is necessary for both alternatives. Additionally, you should be aware that tax advantages on sovereign gold bonds only apply if you retain your bonds until maturity.
If you sell your investment before it reaches maturity, taxation will be due based on how long you held it. Be ready to pay tax on your gains at the applicable rates if you have held your bonds for less than three years.
They can reduce the tax rate by 20% of the gain provided, however, you sold your bonds after holding them for at least three years and after applying the indexation advantage. However, if you wait until you reach maturity, any profit you make is obviously fully tax-free.
You may proceed to purchase Sovereign Gold Bonds on the secondary market if you keep the mentioned considerations in mind. You will, however, be at the mercy of the market’s offerings and will have no control over quantity or price.
Frequently Asked Questions
1. Are gold bonds tax-free?
Sovereign Gold Bonds are taxable if you sell them before they mature, but are tax-free if you hold them until maturity. even if you sell after the lock-in period.
2. Are sovereign gold bonds preferable to FDs?
FD returns are often lower than those from SGBs, but they promise more safety than SGBs. Each scheme operates differently. Your choice is based on your financial objectives and risk tolerance. Finally, FD investments are the safer choice.
3. Do sovereign gold bonds yield a profit?
A sovereign gold bond may be more profitable than actual gold investments and gold exchange-traded funds (ETFs) due to its backing by the world’s most powerful financial institution.
4. Are sovereign gold bonds a wise financial decision?
Regarding the quality of the gold, safety, interest payments, and return on investment at the time of maturity, investing in SGB has no risks.
5. Can a sovereign gold bond cause me financial loss?
When it comes to issues like purity and making fees, SGB is free in the case of gold jewellery. The bonds are safe in the RBI’s accounts or in Demat form, removing the possibility of scrip loss, etc.
6. What happens to sovereign gold bonds after eight years?
Although the bond has an 8-year term, early encashment or redemption is easy on coupon payment dates after the fifth year from the date of issue. If stored in Demat form, the bond will be tradable on exchanges. Additionally, they can give it to any other qualified investor.
7. Which bank offers the greatest sovereign gold bond services?
These Indian government-issued bonds also do away with a number of hazards related to gold that are present in physical form. Purchase these bonds using the iMobile app or online banking at ICICI Bank. Allowance for Hindu Undivided Families (HUF): A maximum of 4 kg, Trusts and related organisations: 20 kg.
8. What are sovereign gold bonds’ drawbacks?
Like conventional interest receipts, interest on SGBs is taxable at your applicable tax rate. Like any other type of financial vehicle, gold bonds have drawbacks. The eight-year maturity of gold bonds may deter many investors.
9. What if I sell SGB earlier than five years?
A person is not subject to capital gains tax when they redeem SGBs. If sold on the secondary market, capital gains resulting from such a transaction would be subject to marginal tax rates if sold before three years and 20% with indexation if sold on or after three years.
10. Do mutual funds outperform gold bonds?
As gold does not pay its investors dividends or interest and you can reinvest, it does not gain from compounding. One of the best investment options when it comes to compounding is mutual funds. We can best achieve long-term compounding by investing in Growth Funds.
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Also Read: Sovereign Bonds and Associated Risks