Gold is a useful commodity for every Indian. Laxmi, the goddess of wealth, is worshiped all over India. The devotees are always on a constant lookout for good fortune. No matter how high the market values range, Indians have enormous reverence for gold. With the rise in inflation, each gram of gold is getting pricey every passing day, which implies that it is a disadvantage for anyone who wishes to buy gold years from today. But what if we invest these grams of gold today to get higher returns in the future? Yes, this is possible. The Government of India has introduced a scheme called the Sovereign Gold Bonds.
Sovereign Gold Bonds are certificates issued by the Reserve Bank of India. This is the most secure investment option that any investor can avail of. It is less prone to market risks and fluctuations in the stock market. Let’s learn more about these bonds by investing a few minutes in reading this article. What are sovereign gold bonds? Who are eligible to apply for this scheme? What some of the features that make it a unique scheme? The advantages and disadvantages of going for Sovereign Gold Bonds. The differences between SGB and physical gold. How to go about the SGB investment scheme? The taxes levied on these bonds and FAQs.Are some of the questions that will be answered through this article.
What Are Sovereign Gold Bonds?
In this article
Sovereign Gold Bonds is an investment made by the customers. This investment is equal to the price of gold, and it’s denominated in grams of gold. The least amount is 1 gm. The bonds are issued as stocks under the Government Security Act, 2006. Holding certificates are issued to the applicants by the Reserve Bank of India. These documents state the applicants’ possession of virtual gold. The Government of India introduced this scheme in the year 2015 under the Gold Monetization Scheme. It aims to provide relief from the possession of real, physical gold.
Although these bonds attain maturity after 8 years, investors can redeem the bonds after 5 years from starting this scheme. The Government announces the issuance of these bonds every 2 to 3 months. During this period, investors can subscribe to these schemes.
Now, let me elaborate on this concept by giving an example:
Suppose Mr. A is saving money to buy Gold for his daughters’ marriage. Assume that the current market value of gold is Rs. 46,000/ 10 gms. He has saved enough to buy 10 grams worth of golden necklace. Five years hence when the market price would have reached around 60,000.
Now consider A has invested the initial amount of Rs. 46,000 in the Sovereign Gold Bond. After a few years, there will be a surge in the market value of Gold. And he now gets returns at the amplified value of Gold and interest, which brings in more profit. So, now Mr. A doesn’t have to work for buying gold; instead, he could make his possession of the virtual gold work for him.
Eligibility Criteria For Sovereign Gold Bonds
Anyone who intends to apply for this scheme should satisfy the following conditions:
a. Only Indian residents are allowed to apply for this scheme, as stated by the Foreign Management Act of 1999.
b. Indians can apply as a single individual or join with another Indian to invest together. A group in the form of associations or organizations are also eligible.
c. Minors are also eligible for this scheme, but their parents or guardians have to buy the bonds.
Salient Features of Sovereign Gold Bond
a. Any resident of India, institutions, HUFs, trusts, organizations, universities, multinational companies, even minors is eligible to invest in SGB.
b. The amount invested in Sovereign Gold Bonds is equal to the market rate of gold per gram. Thus, the least amount invested is equal to the market value of 1 gram. The largest investment for an individual is 4Kgs worth gold. For organizations, trusts, universities, the limit should not exceed 20Kgs of gold.
c. There is a provision for the joint holding of SGB, but the limit to invest at least 4Kgs applies only to the first applicant.
d. The SGB scheme attains maturity after a period of 8 years. But premature redemption is permitted only after 5 years from the date started.
e. The interest rate offered on this scheme is 2.50%. The return amount is most likely to be high as the value of gold rises with inflation. The interest offered further adds to the profit of the investor.
f. While applying for an SGB, every applicant must submit the KYC (Know Your Customer) documents. This includes a copy of PAN card, Aadhar card, driving license, passport, voters ID, etc.
g. The Gold Bonds are issued only by the Government of India through the Reserve Bank of India. Holding certificates are issued to the investors upon purchasing the bonds. These bonds can be held in paper, a holding certificate, or converted to a Demat form.
h. The issue price of SGB is Rs.50/gm and even cheaper when paid online or digitally. This price is determined by the India Bullion and Jewelers’ Association (IBJA). It is based on the closing price of gold of 999 purity for the last 3 days.
i. The bonds’ payment can be made by cash, limited to 20,000 only, cheques, demand drafts, or digital mode.
j. The bonds purchased can be traded on the stock market. This can be done only within a fortnight from the date of issuance from the broker.
k. The bonds can be used to maintain the Statutory Liquidity Ratio (SLR) of the bank.
l. The business agents are provided with a commission of at least 50% by the receiving office. The commission is obtained from the total subscription received by the office.
Merits Of Investing In Sovereign Gold Bonds
- The bonds can be converted into a Demat form by the investors. In Demat form, Sovereign Gold Bond is safer and more reliable than purchasing actual gold bars.SGB is less susceptible to market risks. They cannot be stolen, nor the investors will lose their ownership in the long run.
- With an interest of 2.5% and the market value of gold fluctuating from time and now, the investors get high returns after the maturity of SGB.
- SGBs can serve as collateral against loans. Once the loan-to-value ratio is set to the value of gold, the banks will treat it as a gold loan.
- The investors avail indexation benefits upon transferring the bonds in his possession before maturity.
Why Is The Scheme Sovereign Gold Bond Better Than The Possession Of Physical Gold?
1. SGB offers high returns than physical gold. The former is an investment of gold at the current market value, whereas the latter is buying gold at the current market value. On attaining maturity, the former gives a higher outcome rather than the physical gold, lying idle behind tight security.
2. The safety of SGB is higher than physical gold. Gold, the most valuable commodity, is under constant threat called theft. It may be secure in our coded safes or the secure bank lockers, but burglaries can get us into huge losses. But the SGB is in Demat form, i.e., all our assets are stored in electronic form and hence safe from threats.
3. The purity of physical gold is skeptical but SGB electronic and hence authentic.
4. Both SGB and physical gold can serve as collateral against secure loans availed by the investors.
Drawbacks Of Investing In Sovereign Gold Bonds
Any investment made with gold is economically secure, and the risks associated with it are minimal. But the price of gold ultimately depends upon the market. If there is a dip in the market value of gold, then the capital gain of the SGB scheme will be affected.
The market value of gold depends on various factors
- Demand and Supply
- Movement of currency
- Electronic Transfer Funds.
If the rate of gold falls, then the capital gain upon attaining the maturity of the SGB will be less than expected. Hence this could result in a loss for the investor.
How To Invest In The Scheme Sovereign Gold Bonds?
Any individual who wishes to avail of this scheme should first be eligible. Once eligible, an application has to be duly filled and submitted. This form is available at any authorized post offices, nationalized banks, scheduled private or foreign banks, or stock exchanges. This form can also be downloaded online from the official website of the Reserve Bank of India. PAN number is crucial during application; hence, the applicants must submit a copy of their PAN card. Once applied, the applicants are given an option to either handle the possession of bonds physically or virtually through the Demat account.
Discounts are offered to investors who choose to handle this investment online. But in this case, the issue price of the gold bonds is Rs.50 less than the market value of gold. Once the bonds are mature after a period of 8 years, the investors are notified a month before. During redemption, the amount is credited to the investor’s account mentioned at the time of application. The redemption value depends on the simple average closing price of gold of 999 purity from the previous 3 days as published by the Indian bullion and Jewelers Association.
After reviewing with India’s Government, India’s reserve bank opens subscriptions for the issues in tranches. The RBI notifies the masses regarding the rate of SGB before every new tranche.
Tranches During The Year 2020-21 Are As Follows:
Taxes Levied On Sovereign Gold Bonds
When the Sovereign Gold Bonds are mature, the investors get two types of returns. These are capital profits upon the maturity of the bonds and interest benefits. Taxes are not imposed on the capital gains earned upon maturity. But the interest earned is not exempted from tax. According to the Income Tax norms under the IT Act of 1961, the interest earned is income from other sources and thus taxed.
The resale of the bonds entitles the investors to pay tax on the capital gains. If the resale occurs before 3 years, short-term capital gains are charged on the total profits. The short-term capital gains are charged at the rate of the yearly earnings of the investor. If the resale occurs after 3 years, then the long-term capital gain is charged at 20% of the total earnings.
1. When are the certificates issued to the customers?
2. How is the interest on SGB paid?
3. Is online investment for SGB permitted?
4. Who issues Sovereign Gold Bonds?
5. Are minors allowed to invest in SGB?
6. Where is the application form available?
7. What are the Know-Your-Customer standards?
8. Can every family member apply for Sovereign Gold Bonds and buy 4 Kg in their name?
9. Who are the authorities selling Sovereign Gold Bonds?
10. Can the application for SGB be submitted online?
11. State the procedure for the redemption of this investment.
12. Is the premature redemption of SGB allowed?
13. Can the bond be gifted to close relatives and family friends?
14. Is the nomination facility available on Sovereign Gold Bonds?
15. What happens when the investor expires?
Sovereign Gold Bond is a modern-day innovative method to invest in gold. It is the perfect alternative to buying physical gold. It enables investors to earn high returns. Now they need not make any effort to keep a check on the security of physical gold. Over the years, the market value of gold has seen a significant rise. This scheme serves as the perfect medium to tap the exponential rise in gold prices in the investors’ favor. It is beneficial to all the masses looking forward to an investment opportunity with low-risk and high gains. Moreover, this is the safest way any individual can buy gold. And ensure the security of SGB from the threats faced by physical gold, as SGBs are present in the Demat form.