Four benefits of investing in Sovereign Gold Bonds (SGBs) SGBs are suitable for individuals who prefer consistently accumulating physical gold through their savings
In 2015, the government introduced a program for sovereign gold bonds (SGBs). These bonds are not available on a continuous basis. Instead, the government will periodically open a window for the new issuance of SGBs to investors. At present, the SGB 2023-24 series III is open for subscriptions till December 22, 2023.According to the RBI press release dated December 15, 2023, "The nominal value of the bond based on the simple average of closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three working days of the week preceding the subscription period, i.e. December 13, December 14, and December 15, 2023 works out to Rs 6,199/- (Rupees Six thousand one hundred and ninety nine only) per gram of gold."
Also read: New Sovereign Gold Bond tranche opens on December 18: Know latest SGB issue price
Many financial planners recommend limiting gold allocation to no more than 10 percent of one's investment portfolio. Investors can consider investing in different tranches of SGBs whenever the government issues them. SGBs are suitable for individuals who prefer consistently accumulating physical gold through their savings.
Investors need to be aware of the structure of SGBs, especially if they wish to link it to a specific goal. As with most other investment products, aligning SGBs with one's financial goals is still feasible. In Public Provident Fund (PPF), EPF, National Pension Scheme (NPS) or even fixed deposits (FDs), one can keep saving and still create a corpus to meet financial needs in future.
Also read:Applying for the new Sovereign Gold Bond (SGB) tranche? Here are 15 things you should know
Each issuance of SGBs comes with a five-year lock-in period, which may not align well with short-term goals unless the bonds are purchased in a lump sum. While SGBs are listed on stock exchanges, offering a liquidity route, the secondary market transactions and associated tax implications may not be suitable for all investors.
However, there are benefits of investing in SGB. Here is a look at four benefits of Sovereign Gold Bonds (SGBs).
Investing in SGBs
The sale of these bonds will be facilitated through various channels, including banks, Stock Holding Corporation of India Ltd (SHCIL), designated post offices, and recognized stock exchanges such as the NSE and the BSE. Investors also have the option to hold the bonds in dematerialized form. The sale of Sovereign Gold Bonds (SGBs) is restricted to resident individuals, HUFs, Trusts, Universities, and Charitable Institutions. The bonds will be denominated in grams of gold multiples, with a fundamental unit of one gram. The tenure of these bonds is eight years, with an early redemption option after the fifth year on the day interest is payable. Additionally, the government offers a discount of Rs 50 per gram less than the nominal value to investors who register online and make the application payment through digital means.Also read: 6 ways to invest in Sovereign Gold Bonds
Cost
The significant advantage lies in the cost efficiency of Sovereign Gold Bonds (SGBs) compared to purchasing physical gold or investing in gold ETFs. While the 'making charges,' equivalent to entry charges, can be nearly 25 percent for jewelry, they are nonexistent for SGBs. In the case of gold ETFs, there is an expense ratio (fund management cost) of about 1 percent, along with demat charges. However, there are no costs or charges of any nature associated with buying SGBs. Moreover, the purchase price is determined as the average of the gold prices of the previous week, with an additional discount of Rs 50 applied to that average price.Taxation
The SGB has an eight-year tenor, with an option to redeem early after the fifth year on the date interest is due. Long-term capital gains will be taxed at 20% with an indexation benefit if the SGB is redeemed after the lock-in period of 5 years but before the maturity period of 8 years. Interest earned on SGBs is taxable as income from other sources, whereas TDS does not apply to bonds. Interest on SGBs is taxable under the provisions of the Income Tax Act of 1961. (43 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.Interest
Beyond the potential advantage of benefiting from increasing gold prices, these bonds offer investors a fixed 2.5% interest rate on their investments. Interest payments are made semi-annually, providing investors with a regular income stream. This is a direct advantage, though nominal when compared to holding physical gold or gold ETF units.Also read: How the interest will be paid on the Sovereign Gold Bond subscription amount
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This story originally appeared on: India Times - Author:Faqs of Insurances
