Gold has long been a sought-after investment option, often regarded as a secure asset. Traditionally, individuals have invested in physical gold, such as jewelry or bullion. However, with the introduction of the Sovereign Gold Bond (SGB) scheme in India, there is a more convenient and profitable avenue for investing in this precious metal. The most recent tranche of SGBs became available for subscription on September 11th , 2023, with an issue price of ₹5,923 per gram of gold. Investing in sovereign gold bonds provides assured returns of 2.5% p.a. payable semi-annually. In this blog, we will explore the reasons why you should consider investing in Sovereign Gold Bonds.
1. Assured Returns of 2.5% p.a. Payable Half-Yearly
One of the most compelling reasons to invest in Sovereign Gold Bonds is the appealing interest rate they offer. Investors are guaranteed returns of 2.5% per annum, paid semi-annually on the nominal value. This means that your investment not only benefits from the potential appreciation in the value of gold but also generates a consistent income stream.
2. No Storage Hassles like Physical Gold
Investing in physical gold comes with inherent challenges related to safe storage. Concerns about theft or the cost associated with secure vaults can be a significant headache. Sovereign Gold Bonds, however, eliminate these concerns entirely. As these bonds are held in electronic form, there is no need to worry about the security of your investment. It is a safer and more convenient method of owning gold.
3. No Capital Gain Tax on Redemption
The government introduced the Sovereign Gold Bond Scheme in November 2015, as part of the Gold Monetization Scheme. One of the notable advantages of investing in SGBs is the absence of Capital Gain Tax on redemption. This means that if the value of your gold bonds appreciates over time, you will not be required to pay any tax on the gains when you redeem them. It is a tax-efficient approach to investing in gold.
Under the Sovereign Gold Bond Scheme's structure, the bond has an eight-year maturity period, and any capital gain realized upon maturity is entirely tax-free. However, if you decide to sell the bond before it reaches maturity on the stock exchange, capital gains tax will apply based on the holding period.
Profits from selling the bond within three years are considered short-term capital gains and are taxed according to your applicable income tax slab.
For gains held for more than three years, they are classified as long-term capital gains (LTCG), which are taxed at a flat rate of 20% after adjusting for inflation.
4. Liquidity
Sovereign Gold Bonds are structured to provide liquidity to investors. After an initial lock-in period of five years, these bonds become tradable on stock exchanges within a fortnight of the issuance, as notified by the Reserve Bank of India (RBI). Consequently, if you need to sell your bonds before maturity, you can easily do so in the secondary market. This liquidity can be particularly advantageous during financial emergencies or when you identify a lucrative investment opportunity.
5. Collateral for Loans
Another valuable feature of Sovereign Gold Bonds is their eligibility as collateral for loans. The loan-to-value (LTV) ratio is set to match the ordinary gold loan mandates established by the RBI. Banks can mark the lien on the bond in the depository, making it easier for investors to leverage their investment for financial purposes.
Key Points
Investors can nominate for Sovereign Gold Bonds, but the nomination facility is unavailable for investments made on behalf of minors.
Interest earned on Gold Bonds is subject to taxation as per the Income Tax Act, 1961 (43 of 1961), but individual investors are exempt from capital gains tax upon redemption, with the added benefit of indexation for long-term capital gains from bond transfers.
The redemption price will be in Indian Rupees, determined by the simple average of the closing prices of 999 purity gold over the previous 3 working days, as published by IBJA (Indian Bullion and Jewellers Association).
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