While SGBs are available at an attractive price, investors must prefer gold ETFs for they don’t come with any sort of lock-in period.
By: Tavaga Research
RBI has announced another issue of Sovereign Gold Bonds (SGBs), which started on 22 August, 2022, and will close on 26 August.
The price of the issue is fixed at Rs 5,197 per gram. However, the investors may avail a discount of Rs 50 per gram by applying for the issue online and making the payment against the application. Therefore, the effective cost comes down to Rs 5,147 per gram.
The bonds will be sold through scheduled commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices and recognized stock exchanges, NSE and BSE.
Sovereign Gold Bonds (SGBs) are government securities mandated by the RBI and denominated in grams of gold. Sovereign Gold Bonds were introduced by the RBI in November 2015 as a substitute for holding physical gold. The sovereign gold bonds are issued by RBI on behalf of the government at a set issue price.
The price of a sovereign gold bond is calculated through an average of the closing prices of the 999 purity gold for the last 3 days set by the IBJA (Indian Bullion and Jewellers Association Limited).
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1.Source of Income: The investor is assured of capital gains depending upon the market value of the gold at the time of maturity. Apart from the capital gains, the SGB investor earns a fixed rate of interest of 2.5% p.a. on the investment amount. The interest is credited to the bank account semi-annually.
2. Tenor: The SGBs have a fixed tenor of 8 years with premature redemptions permitted after the 5th year from the issuance date.
3. Risks involved: The sovereignty of the bond ensures no credit risk unlike other corporate debt and hence, the SGBs are only exposed to price risk if the gold price declines.
4. Eligibility: A person who’s an Indian resident as per the FEMA (Foreign Exchange Management Act), 1999 is permitted to invest in the SGBs. Individuals, trusts, HUFs, charitable institutions, and universities are eligible to invest.
5. Investment limit: The minimum investment will be one gram of gold for every person and the maximum investment for an individual and a HUF will be 4 kg.
6. Process of application: Banks and other designated financial institutions can provide an online application facility. For offline applications, banks, designated post offices, and agents can provide forms. The application form is also available on RBI’s website.
7. Taxation: The capital gains from the redemption of the SGBs (at the end of 8 years) are tax exempted but the interest is taxable as per the income tax slab. If an investor sells the bond before redemption then capital gains taxes are applicable. Short term capital gains tax (less than 3 years) is applicable as per prevailing income tax slab and long-term capital gains tax (if more than 3 years) is applicable either at a flat 10 percent or 20 percent with indexation benefits.
Analysts express optimism over the presence of gold in an investment portfolio under the current market conditions. With the fiscal deficit mounting and the countries expanding their balance sheets, central banks will look to increase their exposure to the yellow metal.
Furthermore, with the uncertainty looming in the equity markets owing to recessionary fears worldwide, a moderate 10-20 percent allocation toward gold will not hurt the portfolio. Gold has also corrected from its record highs indicating a buying opportunity.
Gold offers diversification benefits and serves as an inflation hedge. SGB not only offers all the benefits associated with physical gold but also holds numerous advantages, which makes SGB an investment worth exploring.
The recent hike in gold import duty from 7.5 percent to 12.5 percent. This import duty hike will lead to high gold prices for end consumers. This may curtail the demand for gold and reduce discretionary spending on the yellow metal. Also, investing in the ongoing SGB issue makes sense, only if the bondholder is ready to bear the lock-in period of 8 years.
For investors who are not in favor of the lock-in period, must stick to gold ETFs which are also available at an attractive price.
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Very well written blog. Agree with your points. SGB can be a good investmentz option which can provide 2.5% returns per annum. It also has a feature where you can trade your bonds in the stock market if you had bought them in the Demat. You don't have to worry about the storage problem as we have to do for physical gold.