Many investors feel that gold is a good asset class to invest, Reasons:-

• It gives quite reasonable returns over long period and
• Gold acts as a hedge during economic cycles of boom and bust.

In times of global recession, stock prices go down. Bond prices also can go down, if governments borrow more to meet their increasing fiscal deficits. But gold prices remain stable or increase during such recessionary times. 

However, if you want to buy gold physically, you need to bear storage cost i.e. locker rents and also it is not easy to sell physical gold when you need money.

And hence, Gold ETFs came into existence, which enables investors to trade gold on stock exchange and earn returns like they would be doing in case of physical gold. Now, there is one more option available to buy gold in non-physical/ demat form.  Sovereign Gold Bonds (SGB).

What are Sovereign Gold Bonds?

Sovereign gold bonds were introduced by the Government of India in 2015 under the Gold Monetization Scheme, to enable investors to invest in an asset class which is a substitute for physical gold.

RBI announces public issues under the Gold Monetization Scheme in tranches i.e. specifying series along with dates of subscription for the bonds and date of allocation.

The below table gives the SGB schedule of forthcoming issues in the remaining period of FY  2019-20.

As these bonds are issued by the Reserve Bank of India on behalf of the Government of India, they carry sovereign guarantee.

Features of Sovereign Gold Bonds

1. Who are eligible to buy sovereign gold bonds?

Any resident individual including HUFs, trusts, universities and charitable trusts can buy sovereign gold bonds. This bond can also be purchased by a guardian or parent on behalf of a minor. But, a non-resident or ordinarily non-resident of India cannot buy a sovereign gold bond. However, if a resident individual who bought SGBs, who has now become NRI can hold them till the maturity of the bond but cannot repatriate the maturity amount. 

2. Denomination of gold bond

Each investment will be denominated in multiples of gram or grams with a basic unit of 1 gram at least to be purchased in a single purchase i.e. minimum investment. It means if you want to invest Rs. 10,000 and the rate of gold on purchase date is Rs. 4000 per gram, your investment will be denominated in 2.5 grams.

3. Maximum Quantity

Here is a limitation on the amount of gold that can be held in sovereign bonds. Maximum gold one can buy in a financial year i.e. April to March is given for each category of investors is given in the below table.

Category Maximum Subscription in SGB Individuals 4 kg, HUFs 4 kg, Trusts and similar entities 20 kg.

4. Issue Price

The price of the bond will be fixed in Indian rupees on the basis of the average closing price of the last 3 working days of the week preceding the subscription period of gold having 999 purity (24 caret).The issue price of the gold bonds will be less by Rs. 50 per gram for those who subscribe for it online and pay through digital mode.

5. Interest rate

The investors will be paid Interest on the amount of initial investment at the rate notified by RBI for a particular tranche. Till date interest is near to 2.5% per annum.

6. Redemption

Redemption price shall be fixed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment.

7. Listing on stock exchanges

These bonds can be held in Demat form and the government has enabled trading of gold bonds on the stock exchanges i.e. NSE and BSE.

8. Maturity

The tenure of the bond will be for a period of 8 years with exit option only after 5th year. It means one cannot redeem bonds before the end of 5th year. However, if one wants, he can sell and transfer bonds via the stock exchange platform. So, there is no lock-in for SGBs sold through stock exchanges.

9. SGBs can be used as collateral

Bonds can be used as collateral for loans. The loan-to-value ratio (LTV) is to be set equal to ordinary gold loan mandated by RBI. 

How to buy Sovereign Gold Bonds

1. Physical Application Mode:  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.

2. Online Mode:  To invest in bonds using online mode, one can use their intermediaries/broker’s platform or bank platform. There will be a discount of Rs. 50 per gram if you purchase via online mode and paying through digital mode.

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

Conclusion: If you are looking for long term investment in gold then instead of physical gold, SGBs are suggested. You don’t need to pay any capital gain tax on redemption of SGB on maturity or after 5th year. But, there is Short Term or Long Term Capital Gains Tax on the sale & transfer of SGBs through stock exchanges. The interest received on SGB in a financial year is taxable as per the slab rate of subscriber.

Source: Internet