Sovereign Gold Bond (SGB) is much better form of investment in gold rather than investing in any other form such as physical gold, digital gold, mutual fund gold schemes or gold ETF’s.
Moreover, capital gains is also exempted when money invested in SGB and is completely tax free. However interest income i.e. 2.5% is added in your total income and taxable as per your slab rate.
Commodities such as gold and silver has always been a center of attraction not only for investments but as an traditional ethics particularly in India.
Which is good at one hand as these have always been used as hedge against inflation. When the value of currency decreases, commodity can be a safe heaven as its happened in 2020-21.
The investors who are looking to diversify their investment portfolio can opt for these gold bonds. In case if there is a fall in the equities market, the value of gold will increase which will help compensate for the overall risk involved in the entire investment portfolio.
Why SGB is better than any other form of gold investment, We will going to learn later in this post but first let us understand about the basics of Sovereign Gold Bond (SGB) and the Scheme which is issued by Reserve Bank on behalf of Government of India.
What Is SGB (Sovereign Gold Bond)?
Sovereign Gold Bond in short SGB are government securities which fall under the category of Debt Funds and are denominated in grams of gold with the minimum unit of 1 gram. These gold bonds were introduced as an substitute of purchasing physical gold by the Government of India (GOI) in November 2015.
These Gold Bonds are issued by the Reserve Bank of India on behalf of the Government of India and are traded on stock exchange.
In layman terms SGB is alternative option for you in case you are looking to buy gold in physical form, but why, it is because there are lot extra charges which are associated with physical form of gold such as Design and making charges around 8-10% , Cost of storage around 3-4%, GST of 3% applicable, Risk of impurity, Risk of theft etc.
Not only this, In a real life scenario, if you have sold the physical gold ever to any nearby jewelry shop due to some urgent money requirement, they will also charge 20-25% deduction on your gold item, I personally have done this but do not why they do this.
Another point is the bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip/Bill etc.
Therefore, if someone who is looking to make a investment in gold than physical form is the worst case scenario, as the returns are almost negligible. Personally speaking I hate physical gold, only use it may have is because you want to show off at somewhere🤩 .
Keeping my hate behind for physical gold, Sovereign gold bond (SGB) not only have Zero expense ratio, it also earn Fixed interest of 2.5% p.a. which is payable semi-annually (2 times) on the nominal value. over and above the usual returns from gold.
The Overall expense in SGB is zero and hence by far the best form of investment. In order to buy the Sovereign Gold Bond (SGB), Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
The Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges such as NSE/BSE.
When Sovereign Gold Bond Scheme Started In India?
Sovereign gold bonds were introduced and guidelines were setup by the Government of India in month of November 2015 under the Gold Monetization Scheme.
Although the first SGB scheme was launched in India in month of January between 18-22 January 2016.
Since than every year many SGB schemes have been launched by RBI, latest launched SGB Series for the Year 2021-22 are given below:
Tranche |
Date of Subscription |
Date of Issuance |
2021-22 Series I |
May 17–21, 2021 |
25-May-21 |
2021-22 Series II |
May 24–28, 2021 |
1-Jun-21 |
2021-22 Series III |
May 31-June 04, 2021 |
8-Jun-21 |
2021-22 Series IV |
July 12- 16, 2021 |
20-Jul-21 |
2021-22 Series V |
August 09-13, 2021 |
17-Aug-21 |
2021-22 Series VI |
August 30- September 03, 2021 |
7-Sep-21 |
The RBI on behalf of government of India will keep launching this Sovereign gold bonds schemes each year, usually announced through a press release from the Government every 2 or 3 months with a window of one week when investors can subscribe to these schemes.
Calculate Returns earned from SGB scheme using moneycontain SGB return calculator here.
Let us now checkout some of the major benefits and features of Sovereign Gold Bonds.
What Are Sovereign Gold Bond (SGB) Benefits and Features?
Sovereign Gold Bonds is the best gold investment option due to its many features. Some of these features are given below:
Low Risk: Zero risk of handling physical gold, no theft concern, backed by GOI
Earn Interest: 2.50% assured interest per annum on the issue price semi annually, The returns will be directly linked to the market price of gold.
Major Tax Benefits:
- No TDS applicable on interest
- Indexation benefit if bond is transferred before maturity
- Capital gain tax exempt on redemption
However, The interest which is received from gold bonds is taxable under the IT Act, 1961 as per your income tax slab.
Assured Gold Purity: Gold bond prices are linked to price of gold of 999 purity (24 carat) published by IBJA (Indian Bullion and Jewelers Association Limited).
Sovereign Guarantee: Both on redemption amount and on the interest
Indexation Benefit: In the case, an investor transfers the bonds before maturity, the investor will receive indexation benefits and there is a sovereign guarantee on the interest earned and the redemption money. Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax.
Gold denomination: The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.
Digital Format: Investor has an option to hold these bonds either in paper or demat form, whichever is convenient for an individual.
Tenure: This scheme has a maturity period of 8 years. However, investors can opt to exit the bond after the fifth (5) year on the date of interest payouts only.
Premature withdrawal: Premature encashment of these bonds is allowed after 5 years of issue.
Loan collateral: Investors can use these bonds as collateral against loans from Bank, financial Institutions and Non-Banking Financial Companies (NBFC).
Gift/transfer: Investors can choose to gift or transfer these bonds to others as a gift to any relatives, friends or family members etc.
Online Application: The application process for SGB is very simple and fast, with your stock broker, banks and post offices permitted to provide this service, one can apply it online.
Digital Payment modes: One can opt to purchase these bonds through multiple payment modes, with cheque, cash, DDs or electronic transfer accepted.
Nominee Facility: The SGB scheme has a provision for nomination, as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007
Tradable: Investors can trade these bonds on stock exchanges, The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges)
Eligibility Criteria: Unlike other kinds of investments any Indian resident can invest in Sovereign Gold Bonds. Individuals, HUFs, trusts, charitable institutions, universities, etc.
Easy Documentation: To purchase gold bonds, you may require a copy of various documents which are needed for the KYC process such as the Driving License, Passport, Voter ID or PAN Card. Although you won’t require these if you already have a stock broking account who offers investing in SGB Schemes.
How To Invest In Sovereign Gold Bond (SGB) Scheme?
To make investment in Sovereign god bonds (SGB) the easiest way is to apply through a stockbroker using the online trading platform and It will be done in maximum 2 to 3 steps. This is the best way as it saves much time and energy.
Otherwise one can also apply by submitting the application form which will be provided by the issuing banks/SHCIL (Stockholding Corporation of India Limited)offices/designated Post Offices/agents.
It can also be downloaded from the RBI’s website. Private/Govt/Banks may also provide online application facility for SGB. For investors making online payments and whose applications are made in digital mode, they get a Rs 50 per gram discount too!
Let us now understand why Sovereign Gold Bonds (SGB) are better than any other form of gold investment available in financial market as of now step by step.
Why Sovereign Gold Bonds (SGB) are better than Physical Gold?
Sovereign Gold Bonds (SGB) are better than Physical Gold because of the cost associated with physical form of gold, as well as the returns earned in comparison to SGB is very low.
One may call physical gold investment worst form of investment, why?? Let us understand this through a simple example
Physical Gold :
- Design and making charges is around = 8-10%
- Cost of storage around = 4%
- GST applicable = 3%
- Risk of impurity
- Risk Of Theft
- At the time of reselling there will be deduction = 20-25%
- No Sovereign Guarantee
- No Interest on the Investment
So incase if the overall return in a year on Gold if let say 10%, than at best case scenario you may get 3-4% overall return if you are investing in physical form.
Which in reality is almost equal to or less than the inflation for the year. Which means you are negative overall in term of returns earned from investment made in physical form of gold.
Whereas while you invest in Sovereign Gold Bond (SGB) there are no expense ratio, get fixed extra 2.5%p.a. return (Overall 10+2.5%=12.5%) and save Income Tax and long term capital gain Tax (LTCG).
Why Sovereign Gold Bonds (SGB) are better than Digital Gold?
Sovereign Gold Bonds are better than digital gold because with digital gold there are many hidden cost involves which go unnoticed by investors such as Hedging cost, Insurance Cost, Transportation cost, GST charges etc.
Moreover there is different in Bid- Ask price also known as Buy-Sell Spread, for example Suppose you buy 1gm of digital gold for ₹47000, when you redeem it eventually it’ll be much less than purchase price i.e. around 2-3% less.
Therefore the overall returns earned from investing money in digital gold will be much lesser in comparison to SGB. To be precise the overall return on gold is suppose 10% than SGB will give you 12.5% return overall whereas with digital gold it will be around 5-6%.
Calculate Returns earned from SGB scheme using moneycontain SGB return calculator here.
Why Sovereign Gold Bonds (SGB) are better than Mutual Funds Gold Scheme?
Investing in Gold mutual fund is better option than physical and digital gold but not better than Sovereign Gold Bonds due to its overall expenses. The gold mutual fund scheme eventually invest it’s money in Gold ETF (Exchange Traded Funds), hence as an investor you would need to bear the charges from both end.
That is Mutual fund expense charges plus ETF expense which will be around 1-1.5%, which means lesser overall return on gold investment. So incase if gold has overall return of 10% than you would be getting around 8.5 -9% overall returns.
This is still lesser than SGB returns of 12.5% (10%+2.5%).
Why Sovereign Gold Bonds (SGB) are better than Gold ETF?
Gold ETF is best form of investment in gold rather then Physical, Digital or Mutual fund gold schemes but still lacks in from of Sovereign Gold Bonds (SGB) because ETF has Expense ratio of around 0.5 -1% due to brokerage, Demat Account expenses.
Due to this overall return will marginally be down by the same percentage, i.e. if the overall return from gold is 10% than you can expect it to be around 9-9.5%. In comparison to SGB gold schemes it is still lesser by 3-3.5% overall returns.
Plus the extra tax benefits you can get from SGB is an added advantage, hence whenever it comes to gold investment best option is SGB next is Gold ETF. Check out ETF Calculator to calculate returns online easily
Comparison Of SGB Vs Physicals Gold:
Particulars |
Sovereign Gold Bonds |
Physical Gold |
Returns |
More than actual return on physical gold |
Lower than actual return on gold |
Sovereign Guarantee |
Yes |
NA |
Interest on the Investment |
Yes |
No |
Annual fund management fees |
No |
No |
Exit/ redemption option |
Only from 5th year |
Any time exit |
Tradability |
Tradable on exchange, redemption from 5th year onwards |
Conditional |
Liquidity |
Limited |
Highly liquid |
Storage charges |
No |
Yes |
Quality check required |
No |
Yes |
Collateral against loan |
Yes |
Yes |
Purity of gold |
High as it is in electronic/paper form |
Purity of gold always remains a question |
Comparison Of SGB Vs Gold ETF:
Particulars |
Sovereign Gold Bonds |
Gold ETF |
Returns |
More than actual return on physical gold |
Lower than actual return on gold |
Sovereign Guarantee |
Yes |
No |
Interest on the Investment |
Yes |
No as no dividend option is provided on Gold ETF |
Annual fund management fees |
No |
Yes |
Exit/ redemption option |
Only from 5th year |
Any time exit |
Tradability |
Tradable on exchange, redemption from 5th year onwards |
Tradable on exchange |
Liquidity |
Limited |
Highly liquid |
Storage charges |
No |
No |
Quality check required |
No |
No |
Collateral against loan |
Yes |
No |
Purity of gold |
High as it is in electronic/paper form |
High as it is in electronic form |
What Is the process of redeeming the Sovereign Gold Scheme?
The overall tenure of the Sovereign Gold Scheme is 8 years. However, you can also encash/ redeem the bond after 5th year from the date of issue on coupon payment dates.
Depending upon your from where securities have been purchased it will provide other customer services such as change of address, early redemption, nomination, grievance redressal, transfer applications etc.
If you have done it through a stock broker just check out your holdings in your demat account and redeem it.
- The investor will be advised one month before maturity regarding the ensuing maturity of the bond.
- On the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record.
- In case there are changes in any details, such as, account number, email ids, then the investor must intimate the bank/SHCIL/PO promptly.
The redemption price shall be fixed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.
The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.
In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date.
Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date.
The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.
Individuals opting for resale of a bond in the secondary market (Stock Market) have to pay tax on any capital gains realized.
Resale before completion of 3 years attracts short term capital gains (STCG) on total profits, at rates as per the annual income of investors. Long term capital gains (LTCG) , on the other hand, attract tax at 20% of the total earnings, after adjusting the same for indexation in case of premature withdrawal
Frequently Asked Question (FAQ):
Who All can invest in the SGB Scheme?
All Indian residents as defined under the Foreign Exchange Management Act, 1999 are eligible to invest in Sovereign Gold Bonds. Eligible investors include:
- Individuals (Single or joint holding)
- HUFs
- Trusts
- Universities
- Charitable institutions
Note: Minors can also apply for this scheme but for this, parents or legal guardians will have to submit the application on their behalf.
What Is The Minimum Amount one can invest in Sovereign Gold Bond?
The minimum one can invest is 1 gram of gold, suppose if gold current rate is Rs.50,000 per 10 gram than you would need to invest minimum Rs.5000. SGB schemes are launched by GOI and rates per gram beforehand are also mentioned on the scheme.
What Is The Maximum Amount one can invest in Sovereign Gold Bond?
The maximum limit for investment varies as per the categories given below. The maximum investment limit per fiscal (April- March) is as follows:
- Individuals – 4 Kg of gold (In case of joint holding, the limit applies to the first applicant)
- Hindu Undivided Family (HUF) – 4 Kg of gold
- Trusts and similar entities – 20 kg of gold
How Much Interest Can I get From SGBs?
You can earn interest on the amount of initial investment in SGB at the rate of 2.50% (fixed rate) p.a. apart from overall gold returns. The interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
Can I use Sovereign Gold Bonds as Collateral for Loans?
Yes, Sovereign Gold Bonds are eligible to be used as collateral for loans from banks, financial institutions and non-banking financial companies (NBFC). The loan to value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time.
How much Tax Can I save Through SGBs?
The interest on Sovereign Gold Bonds is taxable as per the provision of Income Tax Act, 1961 (43 of 1961) i.e. as per your income tax slab. However, on redemption, the capital gains tax to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.
Is tax deducted at source (TDS) applicable on the SGB?
TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.
From Where I can Buy Sovereign Gold bond schemes?
Sovereign Gold Bonds are sold through Nationalised Banks, Scheduled Private banks, Scheduled Foreign Banks, designated Post Offices and Stock Holding Corporation of India Ltd. and the authorised stock exchanges either directly or through their agents such as stock brokers.
Is there any risks in investing in Sovereign Gold bonds?
Yes, There is a risk of capital loss if the market price of gold declines. However, the investor doesn’t lose in terms of the units of gold which he has paid for.
Is nomination facility available for SGB scheme?
Yes, nomination facility is available as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form is available along with Application form.
An individual Non – resident Indian may get the security transferred in his name on account of his being a nominee of a deceased investor provided that:
- the Non-Resident investor shall need to hold the security till early redemption or till maturity; and
- the interest and maturity proceeds of the investment shall not be repatriable.
What happens to SGB in case of death of the investor?
In case of investors unfortunate death the listed nominee/nominees may approach the respective receiving office with their claim and as per the criteria laid down in Government Securities Act, 2006, s/he will get the claim amount.
Similarly, in case if the SGB are in demat form one can get the money whomsoever is the nominee of the account.
Can I transfer the Gold bonds?
The Sovereign Gold bond can be gifted/transferable to anybody who fulfills the eligibility criteria before maturity.
Who Fix the rate of Gold bonds and How?
The rate of the bond will be set in Indian Rupees on the basis of the simple average of closing price of gold (999 pure) published by the India Bullion and Jewellers Association Limited for the last 3 working days of the week preceding the subscription period.
What is the price of Sovereign Gold Bond?
The price of Sovereign Gold Bonds gets decided by the RBI before launching of the scheme, for example the latest SGB scheme for 2021-22 Series III issue price was at Rs.4,839 (per gram). You can also buy the same online any day when market is opened using your stock brokers account through trading platform at ongoing price.
Is sovereign gold bond get converted to physical gold?
No, Sovereign gold bond scheme is only for making long term investment and it can’t be converted to physical gold as of now. May be in the future the RBI may come up with this scheme.
Can I buy sovereign gold bond without demat account?
Yes, SGB can be bought without demat account as well from near by post offices/banks etc.
Can I sell sovereign gold bond before maturity?
Yes, you can sell SGB before maturity, however Resale before completion of 3 years attracts short term capital gains (STCG @ 10%) on total profits, at rates as per the annual income of investors.
Can I buy sovereign gold bond anytime?
Yes, SGB are tradable online at exchanges, one may buy it using online trading platform anytime through a SEBI registered stock broker such as Zerodha, Groww, Espresso, 5Paisa etc.
Are sovereign gold bond have lock in period?
Yes, SGB comes up with 8 years of lock in period, however one may sell it after 5 years of completion, incase you want to sell it before you are liable to pay Short term capital gain tax @10 depending upon your income tax slab rate.
Is sovereign gold bond tax free?
Yes, SGB are tax free but the interest which is received from gold bonds is taxable under the IT Act, 1961 as per your income tax slab.
- No TDS applicable on interest
- Indexation benefit if bond is transferred before maturity
- Capital gain tax exempt on redemption
Is sovereign gold bond traded on NSE?
Yes, SGB are traded on National Stock Exchange of India.
Where to buy sovereign gold bond online?
In order to buy the SGB online you may use stockbroker trading platform and can invest online.
Conclusion:
Gold in India is considered auspicious and its demand does not stop at its market value. The precious metal is bought on auspicious occasions as an investment and is also beneficial due to its lower risk in the market.
Even though most Indians prefer to purchase physical gold, the yellow metal can be bought through Sovereign Gold Bonds as well which are offered by the Government of India and the Reserve Bank of India.
If you see the overall average gold returns its been between 7-12% however unlike a stock or a bond, it generates no cash flows in the form of profits, dividends, or interest income except SGB.
Moreover, the time duration required for a commodity to give better return are higher, therefore when you count inflation in your returns it is still less comparing to other class of assets such as equity.
Having said that SGB is one of the best way to invest in gold for long term duration in comparison to any other form.
I hope you have understood the Basics of Sovereign Gold Bonds Scheme and will soon start investing in SGB rather than physical gold atleast.
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Note: Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only and intended to give information. All investments are subject to risks, which should be considered prior to making any investments.
