Buying gold is always considered one of the safest investments. It is highly advisable to have gold in your investment portfolio to minimise the risk. The government has just opened the Sovereign Gold Bonds 2020-21 (Series IX) for subscription. For those willing to invest in gold, this could be a safe mode for them to park their money. The last date for subscription is January 1, 2021, with January 5 as the settlement date.
The price of one unit (1 gram of 24 karat) is Rs 5,000 per gram. The government is giving a discount of Rs 50 if investors apply using the digital mode.
What is Sovereign Gold Bond?
SGBs are government-backed securities. The bonds are denominated in grams of gold (999 purity). The RBI issues these bonds on behalf of the government and therefore it attracts investors.
These bonds are substitutes for physical gold. The minimum investment in the bond is one unit (1 gram) while the maximum limit is 4 kg for individuals. For trusts and similar entities that are notified by the government, the upper limit is 20 kg.
The SGB scheme Series VIII offered gold for Rs 5,127 per gram just ahead of Diwali ( November 9 to November 13). However, the price of gold has fallen sharply since then and the latest series of the SGB is available to investors at a cheap rate. Many fear that gold prices will decline further and have apprehension about investing now.
According to Saurabh Khandelwal, owner of Dhanvi Diamond, buying Sovereign Gold Bonds can never be a bad deal, adding that investing in the precious metal is much more easy and convenient now.
"Gold prices will remain volatile for a limited period of time but if we talk about gold prices for the next 2-7 years the prices will going to rise so, if you investing in Gold Sovereign Bonds, this is not for the immediate future but this is for long term future, and definitely gold if going to increase in long time future so it's beneficial," he said.
Where to buy Sovereign Gold Bond
SGBs are sold (both online and offline) through nationalised banks, scheduled private banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.
Sovereign Gold Bond Maturity
These bonds are redeemed in cash on maturity which is eight years by default. The government also allows early redemption after the fifth year.
Sovereign Gold Bond: Price
The value is fixed on the basis of a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period.
Sovereign Gold Bond vs Physical Gold
SGBs come with multiple benefits for both those who want to buy gold in ornament form and those investing in the yellow metal for the sake of investment.
According to experts, when you buy physical gold, it comes with some disadvantages and risks like making charges, storage risk, bank locker charge, and others.
When you buy physical gold, there is a risk of impurity in the metal. The jeweler could mix some other metal in gold. Besides, you pay other charges like design and making. Physical gold also attracts GST.
To tackle these risks, the best product is Sovereign Gold Bond. SGBs have emerged as a secure investment tool as it minimises risks.
10 benefits of Sovereign Gold Bond
1. No design or making charge
When you buy physical gold, you pay a design or making charge which could be 15 to 20 per cent. For instance, when you buy 10 grams of gold ornament from a jeweler, you pay the price of 10 grams of gold and making/labour charge. In some cases, you also pay a design charge. But in SGBs, you don't pay any making charge. You pay the amount for the metal only.
2. No storage risk or cost for storage
Buying physical gold and storing it in your house is always a risky affair. Even if you store the physical gold at bank lockers, you pay a charge. As per the rule, banks don't compensate if the contents of the locker are stolen or damaged. This means, your valuables are not safe even in a bank locker.
3. No impurities
SGBs are free from such issues. These bonds are denoted by 999 purity. But when you buy physical gold from a jeweler, there are chances that the metal could be impure. But the SGBs promise 999 purity.
4. No default risk
There is no risk of default because it is backed by the government. It is issued by the Reserve Bank of India on behalf of the Central government.
5. No GST or STT
SGBs are free of tax which is not similar in the case of physical gold. When you buy physical gold, you pay GST. There is no Security Transaction Tax imposed on trades in SGBs as well.
The quantity of gold for which the investor pays is protected since they receive the ongoing market price at the time of redemption. For example, if you buy 1 unit (1 gram gold) at Rs 5,000 and the market price of gold rises to 8,000 per gram at the time of maturity, you will get the prevailing market price.
Besides, the government gives 2.5% interest yearly on the amount of investment. The interest is credited semi-annually into the bank accounts of investors. The last interest is payable on maturity along with the principal.
7. No capital gains tax
The default maturity period is 8 years. But the government gives an option to exit after 5 years. The capital gains tax at the time of maturity (after 5 years) is exempted. If you exit before 5 years, you will have to pay capital gains tax.
But in the case of physical gold, you pay tax at the time of selling the yellow metal to a jeweler.
However, interest (2.50 per cent per annum on the amount of investment) accumulated on the SGBs is taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961).
TDS is also not applicable to the bond.
8. Collateral for loans
These securities are eligible to be used as collateral for loans. The Loan to Value ratio is the same as applicable to ordinary gold loan prescribed by RBI from time to time. However, sanctioning loans against SGBs is subject to the decision of the financial institutions. It cannot be inferred as a matter of right.
9. DEMAT form
Investors can hold SGBs in Demat form. This means you need not to carry a physical paper all the time.
10. Tradable on exchanges
SGBs are tradable on Exchanges. It can also be transferred to any other eligible investor.