Earn gold’s market returns plus a fixed 2.5% interest per year on the invested amount with Sovereign Gold Bonds guaranteed by the Government of India. Brownie points for tax benefits they offer.
Are Sovereign Gold Bonds (SGB) 2020 – 2021 – SERIES III the smartest way to invest in gold? Let’s find out.
- The issue price for the third tranche of the SGB 2020-21 scheme is ₹4,677 per gram.
- Subscription for SGB – Series III opens on Monday, June 8. The issuance date of this tranche of gold bonds has been fixed on June 16.
- A fixed-rate of 2.5% per annum is applicable to the SGBs, payable semi-annually.
- Lock-in period of 8 years with an exit option in 5thyear
- Buy SGB through commercial banks, the Stock Holding Corporation, designated post offices, and on stock exchanges – BSE and NSE.
- Get tax benefits, including no capital gains tax on maturity.
Let’s first understand what a Sovereign Gold Bond (SGB) is.
SGBs, are government-run bonds denominated in multiples of one gram of gold, issued by the Reserve Bank of India. These bonds are part of the central government’s market-borrowing program wherein each bond represents the value equivalent to one gram of gold. SGB allows you to invest in gold without the need to buy jewellery, gold coins or bars. Buying SGB means you are buying gold in paper or electronic (demat) form, thus getting rid of storage costs and fear of theft.
Know more about Sovereign Gold Bonds Scheme
- SGBs are government securities denominated in grams of gold (1 unit = 1 gram)
- Issued by the Reserve Bank of India on behalf of the Government of India
- Issue price of Sovereign Gold Bonds (SGB) 2020 – 2021 – SERIES III has been fixed at ₹ 4677 per gram
- A discount of ₹50 per gram if you apply through online mode. Thus the issue price for purchasing online would be ₹4,627.
- Issue opens on 08th June 2020 and closes on 12th June 2020.
- Investors will earn returns linked to gold price
- Interest rate is fixed at the rate of 2.50% p.a. on the nominal value paid every six months.
- Safety: Bonds will carry sovereign guarantee both on redemption amount and on the interest
- Minimum investment: 1 gram
- Maximum investment: 4,000 (grams) for Individual, HUF& 20,000 (grams) for Trust and similar entities notified by Govt.
- Holding: Available in Demat & paper form
- Tradability: The bonds will be tradeable on stock exchanges (NSE and BSE) within a fortnight of the issue date, subject to liquidity.
- Tenure: 8 years with an exit option from 5th year onwards
Why should I invest in Sovereign Gold Bonds?
Investing in gold through the Sovereign Gold Bonds (SGBs) offer a lot of benefits and peace of mind. The biggest benefit of investing in SGB is that you earn interest at the rate of 2.50% p.a., in addition to the appreciation of market price of gold. Plus, safety is ensured because these bonds come with a sovereign guarantee.
Unlike physical gold, you don’t have to pay any making charges and you also don’t pay any management fees, like you do on Gold ETFs, making SGB the best way to invest in gold.
Additionally, these bonds also offer tax benefits and various other benefits, which are listed below.
- Safest: Zero-risk of handling physical gold.
- Earn Interest: 50% assured interest per annum on the initial investment.
- Tax Benefits: No TDS applicable on interest. Indexation benefit if bond is transferred before maturity. Capital gain tax exempt on redemption.
- Assurance of Purity
- Sovereign Guarantee: Both on redemption amount and on the interest.
- Easy Exit Option: The bond tenure is for 8 years with an option to redeem from 5th year onwards on the date on which interest is payable.
- Ease of Borrowing Loan: Can be used as collateral for loans.
- Traded on Exchange: All SGBs issued by the government are available for trading on stock exchanges.
How does SGB compare with traditional physical gold and the exchange traded funds (ETFs)?
Please find below a comparison of physical gold, gold ETF and sovereign gold bonds:
|Physical Gold||Gold ETF||Sovereign Gold Bonds|
|Returns||Lower than actual return on gold||Lower than actual return on gold||Higher than actual return on gold|
|Safety||Risk of handling physical gold||High||High|
|Purity of Gold||Purity of gold always remains a question||High as it is in Electronic Form||High as it is in Electronic Form|
|Wealth Tax||Wealth tax applicable at 1% on the total valuation of the assets every year||Not applicable||Not applicable|
|Capital Gain||Long term capital gain tax applicable after 3 years||Long term capital gain tax applicable after 3 years||Long term capital gain tax applicable after 3 years (No Capital gain tax if held till maturity)|
|Tradability / Exit Route||Conditional||Tradable on Exchange||Tradable on Exchange Redemption – 5th year onwards with GoI|
|Storage Cost||High||Very low||Very low|
Are Sovereign Gold Bonds safe to invest?
In terms of credit risk, these bonds are 100 percent safe as they come with a sovereign guarantee. However, since the bond price is linked to the prices of gold, if the prices of gold dropped, the value of your investment will fall. This would be the case even if you owned physical gold. So for example, the SGB May issue, which opened for subscription on 11 May and closed on 15 May, was priced at ₹4,590 per unit. However, since then the gold prices increased and hence the current bonds are priced at
Regardless of market rates, you should rest assured that the amount of gold you purchased doesn’t change. So if you invested in 100 grams of gold, your 100 grams gold is completely safe and locked.
How can I invest in Sovereign Gold Bonds?
You can invest in Sovereign Gold Funds with Arihant Capital using your trading account.
Should I invest in Sovereign Gold Bonds?
Gold should be a part of your investment portfolio as it offers a hedge against inflation and also is a safe haven during volatility. So if you are planning to invest in gold as part of your asset allocation plan, we think a Sovereign Gold Bond is the best way to invest in gold as it offers an additional 2.5% guaranteed return (over and above gold price appreciation), it is backed by GOI guarantee, offers tax benefits and it is also the cheapest and most secured way of investing in gold.
However, if you already have sufficient gold investment, then you should not invest in SGB just because of the benefits it offers. Any investment in gold, should be made with a proper asset allocation strategy that is customized to your life goals and needs.