Sovereign Gold Bond Schemes are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
A sovereign gold bond scheme (SGB) is issued to resident Indian entities by the Reserve Bank of India (RBI) on behalf of the central government. This is a long-term form of market instrument.
The government launched the sovereign gold bond scheme in November 2015 with an objective to reduce the demand for physical gold and shift a part of the domestic savings, used for the purchase of gold, into financial savings. The government offers SGBs in tranches for limited periods.
The tenure of these bonds is for a minimum of eight years, but there are options to exit the scheme in the fifth, sixth and seventh year. Generally, SGBs can be redeemed or encashed on the interest payment dates after five years from the date of issuance.
SGBs come with a sovereign guarantee and are listed on the stock exchanges. Payment for the bonds is made through cash payment (up to a maximum of Rs 20,000) or demand draft or cheque or online banking.
The scheme was implemented as an alternative to purchasing metal gold and mobilise the idle gold held by households and institutions into productive use in the long run.
These bonds are sold through banks, designated post offices, Stock Holding Corporation of India (SHCIL) and recognised stock exchanges - National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Investors in these bonds have the option of holding them in physical or dematerialised form. Investors can buy these bonds through authorised Sebi brokers.
The scheme aims to reduce the current account deficit (CAD) by reducing the country's reliance on the import of gold to meet the domestic demand. Minimum investment in sovereign gold bonds is one gram with a maximum limit of subscription of 500 grams per person per financial year (April-March).
The bonds pay interest at the rate of 2.5 per cent per year, which is payable on a half-yearly basis. The returns on SGBs are linked to the current market price of the yellow metal.
Benefits of sovereign gold bond scheme
The sovereign gold bond scheme provides an alternative for holding gold in a physical form and the risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest.
These bonds don't require making charges, purity and value-added tax in the case of gold in jewellery form and are held in the Demat form for ease of trading, thus eliminating the risk of loss of scrip among others.
SGB holders get cash equivalent at the time of maturity eight years later, which is tax-free. No taxes are imposed on the proceeds from SGBs if redeemed at maturity.
Bonds are beneficial in terms of pure investment products. During the pandemic-induced lockdowns, when jewellery outlets were closed, SGB was an easier option to invest in gold without acquiring the physical form of gold.
Is SGB an attractive investment?
SGBs do well if the gold prices remain strong. Investing in SGBs can be a wise decision for a conservative investor. SGBs are long-term instruments, so investors should be prepared to hold on to them till they mature.
Investors with a trading mindset should avoid investing in SGB as they may not get an exit at fair value on the exchange. Moreover, if the sovereign gold bonds are sold before maturity, then capital gains tax will apply. It is recommended to stay invested in SGB till the maturity period.
