Why should you invest in Sovereign Gold Bonds?

The SGBs have a tenure of 8 years but the scheme allows investors to exercise an option to opt for early redemption any time after completion of 5 years on the interest payment dates.

We Indians have traditionally been investing in gold. Financial planners also advise investing part of your investible fund in gold for proper diversification of your portfolio. Of late, Indian have been investing in Sovereign Gold Bonds (SGB) instead of physical gold due to their attractive features.

Let us discuss the basic features of SGB and why one should invest in these bonds.

Who can be invest in Sovereign Gold Bonds

Any Individual, HUF, a Trust (whether a charitable one or not) and any University which is resident as per the Foreign Exchange Management Act can invest in SGB. One can also invest on behalf of a minor as a guardian. One needs to have a PAN for investing in the bonds. An NRI though himself cannot invest in SGB but can hold the bonds received as a nominee of a resident investor till maturity. These bonds can be subscribed through banks, Stock holding corporation, post offices and recognised stock exchanges.

The application for SGB has to be made for a minimum of 1 gram and in multiple of 1 gram subject to the maximum permissible limit as applicable for the category of the investor. An Individual and an HUF are allowed to invest upto 4 kgs in SGB in each financial year. Other eligible entities can invest upto 20 rgs in a year. These limits are inclusive of investments made either through initial subscription or purchases made on stock exchanges. SGBs can be held singly or jointly but the permissible limit will be computed with reference to the first holder only. The investors can nominate any in respect of the bonds subscribed or purchased.

Tenure and premature redemption of SGB

The SGBs have a tenure of 8 years but the scheme allows investors to exercise an option to opt for early redemption any time after completion of 5 years on the interest payment dates. You can have these bonds in physical form or in demat form. You can convert your holding into physical from demat anytime later on or vice versa. Even during the initial lock-in period for 5 years, the investor is free to sell these bonds on stock exchanges in case he needs money or see price appreciation.

Issue price and redemption price

The SGBs are denominated in a nominal price for each gram which is arrived on the basis of average price of the 0.999 purity gold, as published by the Indian Bullion and Jewellers Association Limited (IBJA), for last three days of the week preceding the week of issue. For the issue which has opened on 12th July, 2021 and is closing on 16th July 2021, the issue price is fixed at Rs 4,807/- per gram. There are more issues every month as announced till September, 2021. Investors applying online and paying through digital mode get a discount of Rs. 50/- per gram. The redemption price of these bonds will also be computed in the same manner as issue price. No physical delivery of gold is given at the time of redemption. Investors of SGGB get annual interest @ 2.50% on the issue price of the bonds, which is paid half yearly.

How the interest and capital gains are taxed on SGB

The interest on SGB is fully taxable in the hands of investors but profits earned on redemption are fully exempt from capital gains tax. Please note that the exemption from capital gains is only available for the bonds redeemed with RBI and not on the profits earned on sale through stock exchanges. In respect of SGB sold through stock exchanges, you can have the benefits of indexation for computing long-term capital gains if held for more than 36 months. Alternatively, you can exercise the option to pay 10% tax on unindexed gains on sale of SGB through your stock broker for investment held for more than 36 months. Profits on bonds sold through stock exchanges before 36 months are treated as short term and taxed at the slab rate applicable to you.

Should you invest in SGB?

Since gold acts as a hedge against inflation and also affords liquidity during time of political and economic instability, one should have some portion of one’s portfolio in gold. In India gold is gifted on all conceivable social occasions, specially at the time of marriage of sons and daughters. So, one should keep on investing in gold so as to be able to accumulate enough gold readily available at the time of marriage in the family. Since the investment in gold through SGB earns you interest as well as the capital gains at redemption are tax-free, you should invest in these bonds to guard you against any inflation and for diversification of your portfolio.

(The author is a tax and investment expert, and can be reached at jainbalwant@gmail.com)