Sovereign Gold Bonds (SGBs) are securities issued by the government. Through SGBs an investor can own gold without the need to worry about holding the actual metal. The Reserve bank of India backs SGBs on behalf of the Government of India. Therefore, SGBs are a popular choice among investors as it is stable, supported and gives a handsome return on maturity
What Are Sovereign Gold Bonds?
SGBs are calculated in terms of gold in grams. The minimum investment is one gram. When an investor buys SGBs, they pay the issue price in Indian rupees and they are issued bonds in certificate form. At the time of maturity of these SGBs, the investor receives whatever is the prevailing market price of gold. This gives investors a high rate of return.
Key Benefits
- Interest Income: SGBs offer a fixed annual interest rate of 2.5%, paid semi-annually, in addition to potential capital appreciation from gold price movement.
- No Storage Hassles: Because SGBs are electronic or paper certificates, there is no risk of theft, impurity, or storage cost.
- Tax Advantages: Capital gains on redemption after maturity (8 years) are exempt from tax. Interest income, however, is taxable as per the investor’s income slab.
- Liquidity Options: Although the maturity period is eight years, investors can exit after the fifth year or sell the bonds on stock exchanges, providing flexibility.
How to Invest
- Subscription Windows: The RBI opens SGB issues in tranches during the financial year. Dates are announced on the RBI and Ministry of Finance websites.
- Where to Buy: You can buy SGBs from banks, post offices, and stock exchanges. You can also use netbanking options of major banks to buy SGBs
- Payment and Allotment: You can pay via UPI, cheque or Demand draft. There is also an option of paying in cash up to Rs 20,000. If you pay digitally, as a token of appreciation you get a small discount.
Points to Remember
- Market Risk: As with any funds, the final price is dependent on the market conditions. The price of SGBs too will fluctuate with the fluctuation in the market. If the market returns are high, SGBs will give you a return that will cover up the cost of inflation and beyond.
- Lock-In Period: Although these are tradable, the liquidity of SGBs are lower than open-ended mutual funds or ETFs.
- Interest Taxation: Sovereign Gold Bonds (SGBs) are taxed, but they offer tax benefits. You get 2.5% annual interest rates which are taxed. But if you hold the SGBs for 8 years, your capital gains will be tax free. Let us say, you want money and you sold those SGBs within 3 years your short term capital gains will be taxed as per current tax structures. If you sell it after 3 years, you will be charged long term gains.
Final Thoughts
Sovereign Gold Bonds is a great introduction to the world of investments. It gives you protection, diversifies your funds and the returns on investments cover up your investments.
If you are someone who is fond of gold but does not want the inconvenience of keeping the physical gold, SGBs are for you. Secondly, if you are someone who considers long term wealth creation, wants protection against inflation and wants to diversify your funds, SGBs are very suited to you.
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