Sovereign Gold Bond: What is it? A complete overview

Sovereign Gold Bond (SGB) scheme was launched by the Government of India in November 2015 under Gold Monetization Scheme.

Further Reading: SIP Calculator

The bonds are issued for subscription by the Reserve Bank of India in tranches on behalf of the government from time to time. The terms and conditions for each tranche are communicated by the RBI to the public. These gold bonds are a substitute for physical gold and are denominated in multiples of a gram of gold.

BENEFITS OF INVESTING IN SOVEREIGN GOLD BOND

1.) SAFETY

Sovereign Gold Bonds provide safety to the investors in the sense that there is no threat of theft which is there in case of physical gold since the storage facility is provided by RBI only and the investors will get the bonds with transaction and holding details which he/she can held in paper form or in demat form.

2.) ASSURED INTEREST

These bonds bear an assured interest of 2.5% p.a. which will be credited in the investor’s registered bank account on half yearly basis.

3.) TAX BENEFITS

• No TDS is to be deducted on interest earned.
• If bonds are transferred after 3 years from the date of issuance but before maturity then the investor can avail indexation benefit.
• If redeemed on maturity the capital gains on maturity will be tax exempted.

 4.) PURITY ASSURANCE

The prices of SGB are linked to the gold prices of 999 purity published by IBJA (Indian Bullion and Jewellers Association). Hence one can be assured of the purity of the gold they are buying.

5.) SOVERIEGN GUARANTEE

These bonds enjoy sovereign guarantee both on redemption amount as well as on interest since these are backed and issued by government of India.

6.) FLEXIBILTY

Though the lock in period of the gold bonds if of 8 years, however there is an option to redeem investment from 5^th year onwards (only on the dates on which interest is payable). Also, these gold bonds are eligible for trading on the exchanges.

7.) USE AS A COLLATERAL

An investor can also use these bonds as collateral for loans. The Loan to Value ratio applicable will be similar to that of ordinary gold loan as mandated by RBI.

Also Read: Retirement Planning :When should you start and how should you plan for your retirement?

FEATURES OF SOVEREIGN GOLD BOND

1.) ELIGIBILITY

The SGB can be subscribed by any of the following: –

• An individual
• An individual on behalf of the minor
• Individual jointly with another individual
• HUF
• Trust
• Charitable institutions and University

 2.) MIN/MAX INVESTMENT

Sovereign Gold Bonds are denominated in units of 1 gram of gold and multiples thereof. Hence, the minimum investment required is the price equivalent to 1 gram of gold while the maximum investment capped in a financial year (April-March) is 4 Kg for individuals and HUFs while it is 20 Kg for Trusts and similar entities provided that: –

• in case of joint holding, the limits are applicable only to first applicant
• annual ceiling includes bonds purchased during initial issuance under different tranches and also those purchased from the secondary market

 3.) ISSUE PRICE

The nominal value of the Bonds is fixed in Indian Rupee terms on the basis of simple average of closing prices (999 purity gold) of last 3 working days of the week before subscription as published by IBJA.

The investors can enjoy a rebate of Rs 50 per gram on the nominal value of the bond if they subscribe to these bonds online and also make payment through digital mode.

4.) RETURNS

The investors will enjoy dual benefits if they subscribe to these bonds. The investors will earn from the appreciation in the prices of the gold over a period of time as the bonds will be redeemed at the then market price of gold. Moreover, in order to make SGB attractive, GOI is providing interest @2.5% p.a. on the amount of investment which will be paid on a half-yearly basis.

5.) TRANSFERABILITY

The SGB holder can even gift or transfer the bond to any relative or friend who fulfils the eligibility criteria.

WHERE AND HOW TO SUBSCRIBE SOVEREIGN GOLD BOND

The interested investors can apply through receiving offices who are authorised by the RBI to receive applications either directly or through agents. Receiving offices include all commercial banks (except Payments Bank, Small Finance Banks and RRB’s), post offices, stock exchanges (NSE Ltd. and BSE Ltd.) and Stock Holding Corporation of India (SHCIL). The bondholders can approach the same receiving office from whom they have purchased SGB for customer services like change in address, nomination, early redemption, etc.

If applying through offline mode, the investor has to submit an application form (Form A) along with the PAN card details to any Receiving Office. The investors can make the payment through cash (capped at Rs 20,000), Demand Draft, Cheque or electronic banking. Where payment is made either through DD or cheque, it is to be drawn in favour of Receiving Office only.

HOW BONDS CAN BE HELD

The investors can hold SGB either in demat form or in paper form. Investors who do not have demat account, will receive a Holding Certificate from the authorised receiving offices through whom they have subscribed the bond and also have an option of receiving the certificate directly on their email id from RBI if the investor has mentioned it in the application form.

Further Reading: Mutual Fund Sahi Hai

REDEMPTION

• The Bonds are tradable on the exchanges if held in demat form, from a date as notified by the RBI which provides an option to the investor for early exit.
• The repayment of SGB becomes due after the expiry of 8years from the date of issuance. Also, pre mature redemption is permitted after 5^th year from the date of issue of bonds and such repayments are generally made on the next interest payment date.

NOTE: Part payments in multiples of 1 gram are allowed after 5 years.

• The redemption price is fixed in INR and is the simple average of the price of past 3 working days, published by IBJA.

COMPARISON BETWEEN SGB/ PHYSICAL GOLD/ GOLD ETF

Further Reading: SBI