Finance / Gold · June 7, 2021

Sovereign Gold Bonds: A Better Alternative To Physical Gold Investment

Introduction

Sovereign Gold Bonds, popularly called as SGBs are government securities dominated in terms of gold which are issued by the Reserve Bank of India. It is an agreement between the investor and the Government stating that the underlying value of this bond is Gold.

These gold bonds are issued by the RBI on behalf of the Government of India every year in 6 series, whose dates are already told in advance on the official RBI website.

Why should you consider investing in SGBs

Before considering to invest in an SGB, we shall analyze how effective is gold as an investment option by studying the past track record.

Track record of Gold price from 1992 – 2021

If you see the above graph of gold for the last 30 years (till 2021) you will see that it has given the following CAGR over the said duration:

Sr NoYear of investment CAGR (%)
1Last 3 years19.75 %
2Last 5 years14.96 %
3Last 10 years9.22 %
4Last 15 years13.37 %
CAGR given by gold as of 2021

Investing in gold is also a good source for portfolio diversification as it acts as a hedge against equity investments. If you have noticed, whenever the index has crashed, the gold has appreciated in value.

The relation between equity investment and gold are inversely proportional to each other. I will try to explain more about it in a different blog post.

Maturity period

As per the guidelines provided by the RBI, the maturity period for the SGB is 8 years. If you wish to sell off the bond back to the RBI before the maturity, you may do so after 5 years.

Also, at the end of 8 years you still think you want to hold it for a longer time, you can can hold it for a maximum of 11 years and not more than that.

After 11 years you are obliged to surrender the bond back to the RBI who will then pay you back the market value of the gold bond.

If you wish to sell the bond before maturity period you can sell it off in the secondary market, which is the stock market. For that you will need to hold the bond units in your demat account.

Holding your bonds in a demat account is a more preferred method as you can have the liberty to sell off the bond before the maturity period if you feel the gold prices are very attractive or you are in desperate need of funds.

Sovereign Gold Bond from a taxation point of view

There are basically two types of gains one will get after investing in a SGB:

  1. Capital appreciation
  2. Annual interest of 2.5% earned

Income from capital appreciation

As you know the gold prices tend to appreciate in value over time. The difference in price at which you have purchased to the price you have sold is the income you have earned as capital appreciation. SGBs are exempt from any long term capital gain taxes.

Income from interest earned

As per the guidelines from the RBI, the investors are paid an additional interest of 2.5% per year on their capital for holding the bond. This gain is liable for income tax and is taxable under the Income Tax Act.

How to apply for Sovereign Gold Bond

There are two ways you can apply for an SGB:

  1. Offline method – Approaching any commercial bank, post office and by submitting an application form.
  2. Online method – Via net banking facility provided by commercial banks or through your stock broker.

Note: You will get an additional discount of Rs. 50/- per gram if you purchase SGB using online method from RBI

RBI issues SGB 6 times in a particular year and you are supposed to apply for it during those issue dates. The dates of issue are pre announced on the official RBI website at the start of the year.

On the other hand you can also purchase SGBs from a secondary markets. Just like the way you purchase normal shares. This is an added advantage if you wish to sell your bonds before the maturity period or want to buy after the issue date.

How to apply for SGB through Zerodha discount broker.

You can apply for SGB through zerodha as well.

Visit https://zerodha.com/gold and you will land on the following page:

You need to have an account with zerodha broker before applying through this method, as the gold bonds will get directly transferred to your demat account. If you currently don’t have an account you can click here to open an account with zerodha.

Know more about how to invest in a SGB though zerodha

Advantages it serves over the physical gold

1. No additional hassle for safety issues

When you own a physical gold, one needs to spends addition effort on storing the gold at a safe place. The best place of storage are bank lockers, which come with an additional maintenance cost. These costs can be saved if you choose SGB as an investment option in gold.

2. SGBs can earn an additional interest

This is an added advantage from holding gold in physical format. An added interest of 2.5% per year are paid to the investors holding these gold bonds. This interest gain is transferred to the investor directly into their bank account once in 6 months.

Also one more important thing to note is that the interest earned is simple interest and not compound interest.

3. Tax benefits

The greatest advantage of the SGBs are that they are exempt from long term capital gain tax. The minimum lock in period to get access to this benefit is 3 years.

Note: The interest earned from the SGBs are liable for tax under the Income Tax Act.

4. Redemption from GST payment during purchase

There is no GST levied on purchase of SGBs from RBI. But if you purchase the same from the secondary markets, in that case you are liable to pay GST.

5. No purity related issues

Gold bonds are backed by gold that are 995 purity ratio as bench marked by the Bureau of Indian standards. In the case of purchasing physical gold there can be some questions raised on the purity of gold.

6. Safest form of investment

Since the bonds are backed by the Government of India, there is a very low chance that the bonds will be defaulted. Hence it is considered as a safe source of investment

Read more about SGBs from the official RBI website.

Conclusion

Personally, I have not invested in SGBs so I don’t have an hands on practical experience on this topic. This blog is just a medium to spread awareness. Please do your further research before investing.

I will update this blog and share my experience and the returns I have gained as and when I engage myself in investing in SGBs. Subscribe to the newsletters if you want to be a part of my community and receive updates every time I post a new blog.