Want to invest in Sovereign Gold Bonds? 7 watch outs to know before investing in SGB So, if you are planning on investing in SGBs here are seven watch outs for you
The latest tranche of the Sovereign Gold Bond (SGB) is open for subscription. It opened on September 11 and will be available for purchase till September 15, 2023. The SGB is one of the ways to own gold in its paper form.Do keep in mind that SGBs are meant solely for the purpose of investment and not consumption. This is because even though you will not own gold in its physical form, by investing in an SGB you can participate in the gold price growth (or even fall for that matter).
Also read: How to buy Sovereign Gold Bonds (SGB) online through SBI, HDFC Bank, PNB, Canara Bank, ICICI Bank
Here is a look at seven watch outs you should know before investing in an SGB.
1. Sovereign gold bonds USP
While physical gold bought from jewellers or banks could come at a premium, of somewhere around 10 percent, the price of SGB is close to the actual gold price. For the current SGB tranch, the nominal value of SGB is calculated as Rs 5,923 per gram. In comparison to the nominal value, the government offers a Rs 50 discount to investors who apply online and pay for their applications using digital ways. For these investors, the gold bond will cost Rs. 5,873 per gram of gold.Added to this, SGB's taxation is in favour of investors as the gains are exempted on maturity unlike physical gold where gains are subject to tax. Interest on SGBs is taxable under the provisions of the Income Tax Act of 1961. The tax on capital gains deriving from the redemption of SGB by an individual is free. Long-term capital gains deriving from the transfer of the SGB will be eligible for indexation advantages.
Also read: Sovereign Gold Bonds: What are the tax implications?
2. Physical gold's pitfalls
Indians' love for gold is no secret. However, holding hold in its physical form, be it jewellery, coins, and bars, comes with its own concerns like safety, high cost, outdated designs, and making charges. Making charges vary depending on the type of gold jewellery you are buying. This is because every ornament requires different style of cutting and finishing. It also depends on how much fine detailing is required in the design, i.e., if it is a man-made or machine-made. Machine-made jewellery usually costs less than man-made ones.3. Availability of SGBs
SGBs availability is not 'on-tap basis'. Instead, the government will intermittently open a window for the fresh sale of SGBs to investors and the bonds will not be available all year round. The government has issued two new tranches of the Sovereign Gold Bonds (SGB) in collaboration with RBI. According to an RBI press release issued on June 14, 2023, the first tranche was available for subscription from June 19-23 and the second tranche is from September 11-15. Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices as may be notified and recognized stock exchanges. For those looking to purchase SGBs anytime in between the only way is to buy earlier issues (at market value) which are listed in the secondary market.4. Money goal has to match the SGB tenure
The tenor of the bond will be for a period of 8 years with an exit option from the fifth year which can be exercised on the interest payment dates. If you are investing in SGB for a specific financial goal, make sure it is at least five years away. Goals such as children's education, marriage or your own retirement, which are at least five years away, may be linked to investment in SGBs.5. Secondary market transactions
Although one can exit in the secondary market anytime, liquidity and price risk may exist. Secondary market transactions may also result in capital gains or loss.6. Accumulating process
Units of SGB can be redeemed only after 5 years and that too at half-yearly intervals.7. Returns of SGBs
SGB returns are market-linked and will depend on gold prices prevalent on maturity after eight years or on premature exit. Rather than owning gold in physical form and not earning anything on it, SGBs mean owning gold and also earning interest on it. The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. The interest on the Gold Bonds will be paid at a fixed rate of 2.50 percent per annum on the nominal value of the bond beginning on the day of issue. The interest shall be paid in half-yearly installments, with the final interest payable along with the principle at maturity.Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp. click here!
This story originally appeared on: India Times - Author:Faqs of Insurances
