What are Sovereign Gold Bonds (SGBs)?

What are Sovereign Gold Bonds?

As the name indicates, Sovereign Gold Bonds are securities issued by the Reserve Bank of India (RBI) on behalf of the Indian government. They are denominated in grams of physical gold but can be held digitally in a dematerialised format. This makes them an excellent alternative for physical gold investments. 

These bonds are issued in cash as a part of the Sovereign Gold Bond Scheme, which was introduced in India in November 2015. At maturity, they are also redeemed in cash, making it easy for investors to realise any potential gains from their holdings. 

Key Features of the Sovereign Gold Bond Scheme 

So, you now know what Sovereign Gold Bonds are, but before you invest in these government-backed securities, you need to know more about the characteristics of SGBs. The key features of Sovereign Gold Bonds include the following:

• Eligibility 

Any person who is classified as a resident of India as per the Foreign Exchange Management Act, 1999 can invest in Sovereign Gold Bonds. This includes individuals, Hindu Undivided Families (HUFs), trusts, universities etc. Minors can also invest in SGBs, but the gold bond investment must be made by the minor’s guardian. 

• Issue of Bonds

The RBI issues Sovereign Gold Bonds in tranches on behalf of the government. Once issued, the bonds can be traded on the stock exchanges like the National Stock Exchange (NSE) and the  Bombay Stock Exchange (BSE). 

• Application 

If you are interested in gold bond investments, you can apply for SGBs in any of the following ways: 

• Through the bank issuing the SGBs
• Through Stock Holding Corporation of India Limited (SHCIL)
• Through designated post offices
• Online through the websites of commercial banks
• On the stock exchanges (in the second market)

• KYC Norms

Investing in Sovereign Gold Bonds also means that you need to fulfil the Know Your Customer (KYC) norms. To do this, you need to submit copies of your identity and address proofs like PAN, Aadhaar, passport, driving license, or voter ID.

• Allotment 

Any eligible investor who submits the valid paperwork for identification and makes the investment within the time specified can be assured of allotment. 

• Denomination

Securities issued under the Sovereign Gold Bond Scheme are available to investors in grams of gold. Each bond’s value is expressed in multiples of one gram of the precious metal. 

• Investment Limits

Gold bond investments have minimum and maximum limits. The minimum amount of investment that any eligible person can make is 1 gram. The maximum amount of SGB investment allowed depends on the nature of the person, as follows:

• Individuals and HUFs: 4 kilograms allowed per investor
• Trusts, universities, and other eligible persons: 20 kilograms per investor

• Interest Rate on SGBs

If you have invested in the Sovereign Gold Bond Scheme, you will earn interest on your holdings at 2.5% per annum. The interest is credited out twice a year directly to the bank account shared at the time of making the gold bond investments. 

• Tenure of Bonds

Each Sovereign Gold Bond has a maturity period of 8 years. However, you can redeem your investments after the fifth year from the issue date. Such redemption is only allowed on the interest or coupon payout dates. That said, SGBs can be traded on the exchanges at any time during business hours and transferred to other eligible investors. 

• Loan Against SGBs

Your SGB holdings can be pledged as collateral for any loan availed from banks, NBFCs and other financial institutions. The loan-to-value (LTV) ratio for such loans will be the same as the LTV that applies to loans where you pledge physical gold — because these gold bonds are considered direct substitutes for the precious metal. 

• Redemption 

Sovereign Gold Bond investments will be redeemed in cash after 8 years from the issue date, at maturity. You can also redeem them prematurely after the fifth year, as mentioned above. The price at which these bonds are redeemed depends on the simple average of the gold closing prices on the 3 previous business days. For this purpose, gold of 999 purity is considered. 

• Taxation

Interest received on SGBs is taxable at the income tax slab rate applicable to you. Indexation benefits are available on the long-term capital gains (LTCG) earned on the transfer of your bonds to another investor. Meanwhile, LTCG on redemption is exempt from tax.

Top Reasons to Invest in Sovereign Gold Bonds

Now that you know the key features of the Sovereign Gold Bond Scheme, check out the top benefits that make SGBs popular among investors looking to invest in gold. 

• Improved safety and security due to demat holdings
• Assured interest payments twice a year
• No making charges and no storage costs
• Improved liquidity as they can be traded on the exchanges
• Option to avail loans against the bond value 

Things to Keep in Mind About Investing in SGBs

Before you make any Sovereign Gold Bond investments, you should also be aware of the following aspects of these securities.

• Inverse correlation to the stock market
• Vulnerability to fluctuations in the currency 
• Potential capital losses if the price of gold declines over the investment tenure

Conclusion 

This sums up the fundamental features and benefits of Sovereign Gold Bonds. Now that you know all about SGB investments and what you should keep in mind before you begin, it is easier to make an informed choice. If you do decide to invest in Sovereign Gold Bonds, ensure that you hold your securities in the demat format for maximum benefits.