Sovereign Gold Bond Scheme

Sovereign Gold Bond Scheme: Sovereign gold bonds (SGB) were introduced by the Government of India in 2015 under the Gold Monetization Scheme. The gold bonds are issued every month from October 2021 to March 2022. Under this scheme, the issues are offered in tranches by the Reserve Bank of India in consultation with the Government of India.

Understanding the Sovereign Gold Bond (SGB) Scheme

Sovereign Gold Bonds will be denominated in the multiples of a gram of gold with the minimum unit of 1 gram. The interest for the gold bonds will be 2.50% per annum which is payable semi-annually on the nominal value. The tenure of the bond will be for a period of 8 years with an exit option available in the 5th, 6th and 7th year on the dates of interest payment. The maximum limit of gold prices which can be subscribed by an individual is 4 kg , 4 kg for a Hindu-Undivided Family and 20 kg for trusts and other similar entities. If the gold bonds are co-owned, the limit of investment will be 4kg which will be applied to the first applicant only.

The gold bonds will be issued as stocks under the Government Security Act, 2006. The investors will also be given a Holding Certificate for the same.

Gold in India is considered auspicious and its demand does not stop at its market value. The precious metal is bought on auspicious occasions as an investment and is also beneficial due to its lower risk in the market. Even though most Indians prefer to purchase physical gold, the yellow metal can be bought through Sovereign Gold Bonds as well which are offered by the Government of India and the Reserve Bank of India.

What are Sovereign Gold Bonds (SGB)?

Gold Bonds fall under the category of Debt Funds and were introduced as an alternative to purchasing physical gold by the Government of India in November 2015. Sovereign Gold Bonds are government securities and are denominated in grams of gold. Investors will have to pay the issued price in cash and on maturity, the bonds will be redeemed in cash.

Sovereign gold bonds are a secured investment tool due to less susceptibility towards market risks and fluctuations. Since these bonds are issued by the Government, a window of time is decided and set beforehand. During this span of time, the gold bonds are issued under the name of the investors in tranches.

The issuance of gold bonds is usually announced through a press release from the Government every 2 or 3 months with a window of one week when investors can subscribe to these schemes. These Sovereign Gold Bonds have a maturity period of 8 years, but an investor can choose to exit after 5 years is done.

Who Can Invest in Sovereign Gold Bond Schemes?

Sovereign Gold Bonds are among the most profitable investment schemes in the market due to their varied benefits and lesser restrictions. The investors who have a low risk-appetite but would want a substantial return on their investment can opt for Sovereign Gold Bond Schemes. The bonds are one of the highest returns bearing schemes which are mandated by the Indian government.

Apart from this, the people who are looking to diversify their investment portfolio can opt for these bonds which make up for the investments which are subjected to high market risks. In case there is a fall in the equities market, the value of gold will increase which will help compensate for the overall risk involved in the entire investment portfolio.

Why should you invest in Gold Bonds?

There are several advantages to investing in gold bonds. The gold bonds are restricted for sale to Indian residents including individuals, Hindu Undivided Families, Trusts, Universities and Charitable Institutions.

Some of the advantages of investing in gold bonds are:

  • These bonds can also be used as collateral for loans.
  • The payment for the bonds can be made with cash up to a maximum of Rs.20,000 or demand draft, cheque or through e-banking.
  • These bonds are eligible to be converted into DEMAT form.
  • Gold bonds are a form of security as they are issued in the form of the Government of India stock.
  • Interest earned on the gold bonds is taxable as per the provisions of the Income Tax Act, 1961.
  • Gold bonds eliminate the costs and risks of storage.
  • There are no making charges or issues related to purity.

How to invest in Sovereign Gold Bonds?

As mentioned before, the issues of gold bonds are made open for subscription in tranches by the Reserve Bank of India after consulting with the government.

The tranche for the 2021-2022 series subscription is as follows:

TrancheSubscription DateIssuance Date
2021-22 Series VII25 October – 29 October 20212 November 2021
2021-22 Series VIII29 November – 3 December 20217 December 2021
2021-22 Series IX10 January – 14 January 202218 January 2022
2021-22 Series X28 February – 4 March 20228 March 2022

To invest in gold bonds, you can fill in the application form which is provided by issuing banks or from designated post offices. You can also download the application form from the website of the Reserve Bank of India. Many banks such as the State Bank of India and Kotak Mahindra Bank offer the provision of applying for bonds online.

Every applicant must provide their PAN number issued by the Income Tax Department. Without a PAN, one cannot apply for investing in gold bonds.

The gold bonds are sold through the offices or branches of Nationalized Banks, Scheduled Private Banks, Scheduled Foreign Banks, Designated Post Offices, and the Stock Holding Corporation of India.

There is a certain eligibility criterion that must be met to be allotted gold bonds. Applying for it does not ensure that you will be given the bond. You can apply for the gold bonds online on the websites of the listed commercial banks. The issue price of the gold bonds will be Rs.50 per gram less than the nominal value for those investors applying online.

Eligibility for Sovereign Gold Bond Scheme

Individuals who are keen to participate in the Sovereign Gold Bond Scheme need to satisfy the following simple eligibility criteria.

  • Indian resident – This scheme is open only to Indian residents, with the Foreign Exchange Management Act of 1999 formulating the eligibility criteria.
  • Individuals/groups – Individuals, associations, trusts, HUFs, etc. are all eligible to invest in this scheme, provided they are Indian residents. Under the scheme, one can jointly invest in bonds with other eligible members.
  • Minors – This bond can be purchased by guardians or parents on behalf of minors.

Features and Benefits of Sovereign Gold Bond (SGB) Scheme

Sovereign Gold Bonds have been opted as an investment avenue due to their many features. Some of these features are given below:

  • Gold denomination – These bonds will be issued in multiple weight denominations, starting from 1 gram onwards, providing flexibility in terms of purchasing gold which suits the needs of an individual.
  • Format One has an option to hold these bonds either in paper or demat form, whichever is convenient to an individual.
  • Flexibility – Investments in this scheme are flexible, with one having an option to choose the amount he/she wishes to invest.
  • Interest Investments in this scheme are eligible to earn interest every year.
  • Interest Rate For the gold bonds, the Reserve Bank of India is offering an annual interest rate of 2.50% and is paid twice a year on the nominal value. The returns will be directly linked to the market price of gold.
  • Safety Sovereign gold bonds are known to be safe since they are government securities and do not carry the risk which having physical gold carries such as the possibility of theft.
  • Purity Since it is backed by the government, one is assured of purity of gold when they invest in the scheme.
  • Maturity This scheme has a maturity period of 8 years.
  • Gift/transfer Investors can choose to gift or transfer these bonds to others, provided they meet the necessary eligibility criteria.
  • Premature withdrawal Premature encashment of these bonds is allowed after 5 years of issue.
  • Loan collateral – Investors can use these bonds as collateral against loans.
  • Application The application process is simple and fast, with banks and post offices permitted to provide this service.
  • Payment modes One can opt to purchase these bonds through multiple payment modes, with cheques, cash, DDs or electronic transfer accepted.
  • Nomination This scheme has a provision for nomination, adhering to the rules of the land.
  • Tradable Investors can trade these bonds on stock exchanges, subject to notifications of the Reserve Bank of India.
  • Value: The value of these gold bonds is assessed in the multiples of grams and the basic unit which can be purchased is 1 gram and the maximum an investor can purchase is 4 kg of gold per investor who can be an individual or a Hindu Undivided Family. For trusts and universities, 20 kg of gold can be purchased.
  • Eligibility Criteria: Unlike other kinds of investments any Indian resident can invest in Sovereign Gold Bonds. Individuals, HUFs, trusts, charitable institutions, universities, etc.
  • Interest Rate: For the gold bonds, the Reserve Bank of India is offering an annual interest rate of 2.50% and is paid twice a year on the nominal value. The returns will be directly linked to the market price of gold.
  • Tenure – The maturity period of gold bonds is 8 years. However, investors can opt to exit the bond after the fifth year on the date of interest payouts only.
  • Documentation – To purchase gold bonds, you will require a copy of various documents which are needed for the KYC process such as the Driving License, Passport, Voter ID or PAN Card.
  • Issuance of the bonds – The gold bonds are only issued by the Government of India Stocks on behalf of the Reserve Bank of India as per the GS Act, 2006. Once a person invests in gold bonds, he or she will be given a Holding Certificate which can be converted to a Demat form as well.
  • Tax – The interest which is received from gold bonds is taxable under the IT Act, 1961. During the redemption of gold bonds, the capital tax gains applicable to the investor is exempted from tax. Apart from this, indexation benefits are provided to an investor for the long-term capital gains which are generated.
  • Redemption Price – The redemption price will be in rupees and is based on the average of the closing price of the metal of 999 purity on three previous days.

Advantages of Sovereign Gold Bonds

  • Indexation Benefit: In the case, an investor transfers the bonds before maturity, the investor will receive indexation benefits and there is a sovereign guarantee on the interest earned and the redemption money.
  • Trade Benefits: An investor can also trade the gold bonds on various stock exchanges within a particular date. Gold bonds can be traded on the National Stock Exchange and the Bombay Stock Exchange after 5 years of tenure.
  • Collateral against loans: Some banks do accept Sovereign Gold Bonds as collateral or security against various secured loans.

Sovereign Gold Bonds vs Gold ETFs vs Physical Gold

ParticularsGold ETFnSovereign Gold BondPhysical Gold
Safety of goldHighHighRisk of theft, wear/tear
Returns and earningsLess than actual return on goldMore than actual return on goldLower than the real return on gold due to making charges
PurityHigh due to its existence in electronic formHigh due to its existence in electronic formThe purity of gold cannot be exactly determined
Tradability CriteriaTradable on Stock ExchangeCan be traded and redeemed from the 5th year with the governmentRestrictive
GainsLong-term capital gain post three yearsLTCG after three years. (No capital gain tax if redeemed after maturity)LTCG after three years
StorageMinimalMinimalHigh
Loan collateralNot acceptedAcceptedAccepted

To conclude, Sovereign Gold Bonds are among the top gold-related investments in the market which belong under the new-age investment avenues. It is however advised that adequate research be done before investing in any kind of investment vehicle.

Sovereign Gold Bond Scheme Interest rate

The government has fixed an interest rate on this scheme, with all investors eligible to earn an interest on their investment. The current interest rate stands at 2.50% per annum, with this interest paid every six months, with the last interest amount payable along with the principal amount on maturity. This interest rate can be changed by the government as per its policies.

Risk associated with Sovereign Gold Bonds

Gold, is traditionally very safe investment, and typically the risk associated with Sovereign gold bonds is very low. However, given the fact that gold rates depend on market performance, any drop-in gold rates could put the capital at risk, which would be the case even if one owned physical gold. Regardless of market rates, an investor should take solace in the fact that the amount of gold he purchased doesn’t change.

KYC Documents required

The following KYC documents are required to invest in Sovereign Gold Bonds:

  • Proof of identity (Aadhaar card/PAN or TAN /Passport / Voter ID card)
  • KYC process will be carried on by bond issuing banks, agents or post offices.

Maximum /minimum amount of investments under Sovereign Gold Bond Scheme

Sovereign Gold Bonds are issued in denominations of 1 gram of gold and multiples of it. The gold scheme accepts a minimum investment of 1 gm and a maximum investment of 4kg from a single person in a fiscal year.

FAQs on Sovereign Gold Bond Scheme (SGB)

  1. Where do I get the application for SGB?The application form for SGB will be available AT issuing post offices and scheduled commercial banks. It can also be downloaded from the official website of the Reserve Bank of India.
  2. Is a minor eligible for investing in SGB?Yes, minors are also eligible for investing in SGB under the supervision of guardian/parents.
  3. Is there any risk involved in investing in SGB?Yes, there might be a risk of capital loss when the market rate of gold goes down. But, it does not affect an investor’s units of gold for which he/she has paid.
  4. Can I apply for SGBs online?Yes, you can apply for these bonds online by visiting the official website of designated commercial banks issuing these bonds.
  5. Can I take a loan against Sovereign Gold Bonds?Yes, you can take a loan by using these bonds as securities. These bonds can be used as collaterals at banks, financial Institutions and other non-banking financial companies.
  6. Is tax deducted at source (TDS) for investing in SGBs?No. Tax is not deducted at source.
  7. How do I pay for these bonds?There are a number of payment options available to pay for these bonds. You can pay via demand draft/electronic fund transfer/ cash or cheques.
  8. Is it possible to invest in Sovereign Gold Bonds in DEMAT account?Yes, you can keep these bonds in DEMAT account.
  9. Can Sovereign Gold Bonds be traded?Yes, Sovereign Gold Bonds are tradable on stock exchanges as per the RBI notification.
  10. Can I sell or transfer Sovereign Gold Bonds purchased by me?Yes, you can sell or transfer your bonds as per the provisions of the Government Securities Act.
  11. Can I purchase bonds worth 500gram every year?Yes, you can purchase 500 gram worth of gold every year under the Sovereign Gold Bond Scheme.
  12. Is the nomination facility available for SGBs?Yes, the nomination facility is available for SGBs. A nomination form is attached with the application form.
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