Sovereign Gold Bonds (SGBs) have changed the way retail investors invest in gold. For centuries, investors believed gold to be a store of value against inflation. However, their preferred mode of investing in gold was limited to gold jewellery and gold coins. This resulted in unnecessarily high making charges, as high as 3-25%. Additionally, the risk of loss or theft is ever present when it comes to physical gold. Fortunately, all these hassles have been eliminated by sovereign gold bonds.

Sovereign gold bonds are a better and risk-free alternative to investing in physical gold. But what are sovereign gold bonds? What is the difference between physical gold and sovereign gold bonds? And most importantly, should you invest in sovereign gold bonds? Let’s find answers to these questions by exploring everything about sovereign gold bonds. 

In this article:

1. What are sovereign gold bonds?
2. Benefits of gold bonds
3. How can you buy sovereign gold bonds?
4. Can you buy sovereign gold bonds from the secondary markets?
5. Comparison between physical gold and sovereign gold bonds
6. Tax implication on sovereign gold bond
7. Are sovereign gold bonds right for you?
8. FAQs

What are Sovereign Gold Bonds?

Sovereign gold bond is a type of government bond which tracks the price of domestic gold. It was introduced during the Union Budget of 2015-16. The aim of sovereign gold bond is to reduce the demand for physical gold and the overall import duty paid by the government. Sovereign gold bonds are denominated in units of one gram of gold with 999 purity

The value of sovereign gold bond is calculated by taking an average of closing prices of the last three working days before the subscription period. This is done by the India Bullion and Jewellers Association Limited.

So, what are sovereign gold bonds? It is a loan given by you to the government. The tenure or duration of this loan is fixed at 8 years. Now typically, a bond gives you a fixed rate of interest. But the beauty of sovereign gold bonds is that the rate of interest keeps on fluctuating as the price of domestic gold moves up and down. To further sweeten the deal, the government also gives 2.5% fixed interest every year, which is paid semi-annually.

Sovereign gold bonds are issued by the RBI in 4-6 tranches every year under the consultation of the Government of India. Here are the tranches of sovereign gold bonds issued in 2021: 

 Features of Sovereign Gold Bonds –

1. 1. Sovereign Gold Bonds symbolise a loan agreement between investors and the government.
   2. Sovereign Gold Bonds are issued by the RBI on behalf of the government.
   3. The objective of Sovereign Gold Bonds is to discourage investors from buying physical gold.
   4. Sovereign gold bonds are denominated in one gram of gold having 999% purity.
   5. The tenure of sovereign gold bonds is 8 years.
   6. In addition to the capital appreciation, sovereign gold bonds also pay a fixed 2.5% annual interest, paid semi-annually.
   7. Sovereign gold bonds are extremely safe and carry zero default risk.

Benefits of Investing in Sovereign Gold Bonds – Advantages of Sovereign Gold Bonds

Hassle-free Investment: Investing in physical gold has multiple limitations such as fear of theft, storage cost, insurance and a lot more. Hence, people avoid purchasing physical gold in huge quantities.  But with sovereign gold bonds, you can buy up to 4 Kg of gold without any physical possession. Moreover, there are no hefty making charges or storage costs involved as sovereign gold bonds are stored in Demat accounts.

Dual Streams of Return: Sovereign gold bonds offer you dual streams of income in the form of capital appreciation and fixed annual interest. 

Capital appreciation of gold: In November 2015, one unit of sovereign gold bond was issued at Rs 2,684. Its price in October 2021 is Rs 4,761. If you had bought  one unit in November 2015, you could have earned 77% capital appreciation over the issue price. 

Interest payment: Apart from capital appreciation you also earn a simple interest of 2.5% per annum. It means the interest you earn will not compound. Instead, it will be credited to your account semi-annually. This is not possible when you invest in physical gold.

999% Pure gold: A big issue with physical gold is its purity. Jewellers often fool investors with 916 gold or 22-carat gold. But with sovereign gold bonds, 999% purity gold is guaranteed. Each unit of the sovereign gold bond is linked to the price of 24-carat gold published by India Bullion and Jewellers Association Limited. Hence, Sovereign Gold Bond ensures the quality of gold is protected.

High Liquidity: While selling physical gold can be a hassle, investors of sovereign gold bonds can sell their bonds from the comfort of their homes. Sovereign gold bonds enjoy high liquidity as they are actively traded on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). However, there is a small condition. Investors can sell their sovereign gold bonds in the market only after holding them for five years.

Ease of Borrowing: Sovereign gold bonds can also be used as collateral for loans. You can easily avail loan against sovereign gold bonds at banks and non-banking financial institutions (NBFCs). These loans are considered gold loans.

Hedge against Equity Markets: Historically, gold and equity markets have an inverse relationship. This is because when markets are falling, investors flock to gold as a safe haven. This increases its demand and price.  So, investing in sovereign gold bonds is a great way of hedging the market risk arising from your equity portfolio.

Watch this video to learn about factors that affect gold prices – Technical Analysis for commodity market beginners.

Discount on Online Purchase: If you invest in sovereign gold bonds online, you get a discount of Rs 50 per gram of gold compared to the nominal value you would pay in an offline transaction.

Helping the Economy: The aim of sovereign gold bonds is to discourage investors from purchasing physical gold. India is an importer of gold. So, when you as an investor buy gold, the government has to spend its precious foreign reserves. So, when you invest in sovereign gold bonds, you are helping the economy by preserving its foreign reserves.

How Can You Buy Sovereign Gold Bonds?

You can invest in sovereign gold bonds in two ways.

1. Offline application
2. Online application

First, let us understand the offline process of investing in a sovereign gold bond.

Offline Application: Investing in Sovereign Gold Bonds Offline

You can invest in sovereign gold bonds through nationalised banks, private banks, foreign banks and post offices. 

List of 21 private banks through which you can invest in gold bonds offline.

List of 44 RBI approved foreign banks which offer you the facility to invest in gold bonds offline.

Apart from these banks you can also visit post offices to invest in sovereign gold bonds.

Firstly, you need to visit the bank branch or post office, fill an application form and collect the acknowledgement receipt. After the date of assurance, a certificate of holding will be issued which needs to be collected from the designated post office or bank branch. 

Online application: Investing in Sovereign Gold Bonds Online

You can buy Sovereign Gold Bonds online at most banks through net banking portal or your Demat account. 

Firstly, let’s take a look at the process of investing in a sovereign gold bond through a net banking portal.

1. Log in to your net banking account and click on the sovereign gold bond option. Usually when the bond is open for subscription most banks display the bond details on the home page for user convenience. 
2. You need to fill in your details like your name, address, PAN number and nomination. 
3. Next, you need to enter the units you wish to buy. The amount of each bond is declared by RBI and is also mentioned on your net banking screen. As you are buying these gold bonds online you will also get a discount of Rs. 50 per gram. 
4. After completing the transaction, you will receive your acknowledgement receipt via mail.

You can also invest in the sovereign gold bond through your Demat account. All you need to do is fill a similar application form and apply with the help of your broker. After successful application, the units of the bond will be credited into your Demat account. As these bonds are listed on the stock exchanges, and you can even exit them before maturity.

Can you buy sovereign gold bonds from the secondary markets?

Yes, you can easily buy units of sovereign gold bonds from the secondary markets. However, it is important to note that the trading volume of the bond in the secondary market is very low. Hence, because of low demand, the price of units usually trades at a discount as compared to market rates. 

For example, on 15th September 2021 according to the Indian bullion jewellers association, the price of 1 gram of gold was Rs. 4,837. On the other hand, the last traded price of 2.50%GOLDBONDS2027Sr-II was Rs. 4,750 on the National Stock Exchange. Thus, sovereign gold bonds usually trade at a discount of 3-5% to their market value.

You can take advantage of the discounted rates and buy a few units of the bond. But it is beneficial only if you hold it till maturity. Because if you try to sell it on the stock exchange then you might have to sell it at a discounted price. 

Comparison Between Physical Gold and Sovereign Gold Bonds

 Tax Implication on Sovereign Gold Bond

• If you hold sovereign gold bonds for 8 years, then the capital gains you earn are tax free. 
• If you sell sovereign gold bonds after 5 years, then you will have to pay long-term capital gains (LTCG) at 20% with added cess and indexation.

Tax Implications on Sovereign Gold bonds listed on the stock exchanges

When you sell sovereign gold bonds in the secondary market (stock exchange), it is not considered as redemption. Instead, the ownership is transferred to the new buyer. So, if you sell sovereign gold bonds in the secondary market before maturity then you need to pay capital gains tax. 

• If you sell the bond in the secondary market within three years of purchase, then you have to pay short term capital gains (STCG) as per your tax slab.
• If you sell the bond in the secondary market after three years of purchase, then you are eligible for long term capital gains of 20% with indexation and cess or 10% without indexation benefits. 
• The 2.5% annual return you receive on the bond is added to your taxable income and is taxed according to your tax slab. 

Are Sovereign Gold Bonds Right for you? Should you invest in Sovereign Gold Bonds?

Sovereign Gold Bonds are ideal for investors who are looking for stable investment with fixed returns. Since Sovereign Gold Bonds are issued by RBI and backed by the Government of India, they are extremely safe. 

Sovereign gold bonds are also ideal for investors who are looking to diversify their portfolio. By investing a small corpus in sovereign gold bonds, you can balance the risk of your equity investments. You can also invest in gold bonds on behalf of your child. So that when they grow older, they can reap the benefits of the investment made by their parents. 

However, we would recommend you to buy sovereign gold bonds through your Demat account as you get a discount on online purchase, safe storage and you can sell the units in the secondary market anytime you wish to. 

So, don’t wait for long. Open a Demat account before RBI announces the next tranche of Sovereign gold bonds.  Samco’s Demat account provides you with quick and hassle-free investing at your fingertips. Open a Demat account at Samco today!

FAQs on Sovereign Gold Bonds

1. What is the maximum tenure of sovereign gold bonds?

Sovereign gold bonds mature after eight years. But investors have an option to redeem the bond prematurely after the fifth year.

2. Can anyone from around the world invest in sovereign gold bonds?

Only Indian residents, Hindu Undivided Families (HUFs), trusts, charities and universities can invest in sovereign gold bonds. Non-Resident Indians (NRIs) and foreign institutional investors cannot invest in sovereign gold bonds.

3. What is the minimum and maximum investment in Sovereign gold bond?

4. How can sovereign gold bonds be redeemed?

Upon maturity, sovereign gold bonds will be automatically redeemed according to the average closing price of three days of gold prior to the date of maturity. Later, the amount will be credited into your bank account.

5. If I wish to apply to sovereign gold bonds offline, do I have to pay in cash or cheque?

In case of sovereign gold bonds, investment up to Rs 20,000 is allowed in cash. Apart from cash, cheques and demand drafts are also accepted.