Indians have a fancy of buying gold. Not only for jewelry but the trend to invest in Gold also emerged due to financial volatility since Covid & other political instabilities across the globe. The government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds (SGB). These will be issued in tranches and here are the complete details, features of SGB & details of previous issues so far, and forthcoming.

Also below you will find the comparison of SGB, Gold ETF & Physical gold.

Let us see the basic features of Sovereign Gold Bonds (SGB)

Who will Issue the Bonds?

To be issued by Reserve Bank India on behalf of the Government of India.

Eligibility for SGB

The Bonds will be restricted for sale to resident individuals, HUFs, Trusts, Universities, and Charitable Institutions.

Denomination of Sovereign Gold Bonds

The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

Tenor of Sovereign Gold Bonds

The tenor of the Bond will be for 8 years with an exit option after the 5th year to be exercised on the interest payment dates.

Minimum size

The minimum permissible investment will be 1 gram of gold.

Maximum limit

The maximum limit of subscribed shall be 4 KG for individuals, 4 Kg for HUF, and 20 Kg for trusts and similar entities per fiscal (April-March) notified by the Government from time to time. A self-declaration to this effect will be obtained. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the Secondary Market.

Joint holder

In the case of joint holding, the investment limit of 4 KG will be applied to the first applicant only.

Redemption price

The sovereign gold bonds will be redeemed for cash at the end of the investment tenure. Redemption will take place at the prevailing gold price (based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of redemption, published by the IBJA), giving the investor the value of the bond plus capital appreciation/depreciation from increase/fall in the gold price.

Premature redemption

From the 5th year, investors can approach the concerned bank/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date.

Liquidity

Liquidity is available from secondary markets as these bonds are mandated to be listed on BSE and NSE. However, the liquidity of the past issues are quite low and restricted only to few tranches. Most of the past series of SGBs are trading at a discount to the gold prices due to lack of liquidity and depth in the market.

Issuance form

The Gold Bonds will be issued as Government of India Stock under GS Act, 2006. The investors will be issued a Holding Certificate for the same. The Bonds are eligible for conversion into demat form.

Interest rate paid on SGB

The investors will be compensated at a fixed rate of 2.50 percent per annum payable semi-annually on the nominal value.

Nomination facility

Yes. Nomination and its cancellation shall be made in Form ‘D’ and Form ‘E’, respectively.

Loan against Bonds

Available. The loan-to-value (LTV) ratio is to be set equal to the ordinary gold loan mandated by the Reserve Bank from time to time.

Transfer

The Bonds shall be transferable by the execution of an Instrument of transfer as in Form ‘F’.

KYC documentation

Know-your-customer (KYC) norms will be the same as that for the purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN, or TAN /Passport will be required. Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to individuals and other entities.

Tax treatment

The interest on Gold Bonds shall be taxable as per the provision of the Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.

Is capital gain tax payable on gains in SGB?

If SGBs are encashed by way of redemption by an individual from the RBI, no capital gains tax is payable.

In case the SGBs are sold before the maturity date on the exchanges, then this exemption is not available. The Capital Gains will be levied (Long term or Short term based on whether it is held for 3 years or more or less than 3 Years) at the applicable rates i.e. short term (at applicable rates to the investor) and long term (20% after indexation).

Tradability

Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.

Key Benefits of Sovereign Gold Bonds (SGB)

• Sovereign Gold Bonds deliver two streams of returns. One in the form of regular interest of (2.50% p.a.) on invested capital every six months and the other in the form of capital gains at the time of redemption in case the price at the time of redemption is higher.
• Bonds are freely tradable on stock exchanges within a fortnight of the issuance on a date notified by the RBI.
• The bonds will be available both in demat and paper form.
• In Union budget 2016, Finance Minister exempted capital gains tax on redemption on such bonds (under the normal case, LTCG tax is levied 20% with indexation on gain). Indexation benefits will be provided to long term capital gains arising to any person on transfer of bond.
• The issue price is fixed at Rs. 50 less than the nominal value per gram for digital applications is beneficial for investors. This helps investors to get slightly higher returns than that of the gold price in the spot market.

Previous Issue Details of SGBs:

Forthcoming Issues of SGB 2021 in FY 20-21:

What are the benefits of buying these bonds in comparison to physical gold?

No impurity risk – These bonds are denoted by 999 purity. When one buys physical gold from a jeweler, the purity of the metal could be a concern.

No storage risk or cost of storage – Storing physical gold could be a risky affair and involves storage/locker/insurance charges. None of these are applicable for SGBs.

No default/counterparty risk – Physical gold holders could be exposed to counterparty risk, whereas SGBs are backed by the government and issued by RBI on behalf of the central government.

No GST or STT – Purchase of physical gold attracts GST. SGBs do not attract GST and there is no STT charged on SGB trades.

Comparison between Sovereign Gold Bonds and Gold ETF

Two Streams of Returns – SGBs deliver returns in form of the interest income (2.50% p.a) on invested capital and form of capital appreciation at the time of redemption, in case the price at the time of redemption is higher. ETFs generate returns only through capital appreciation if the price at the time of redemption is higher.

Transaction charges – Investors have to bear the transaction charges if they want to trade in Gold ETF while there is no such charge involved with SGBs.

Expenses – Gold ETF deducts some charges in the name of TER (Total Expenses Ratio) from the total assets. This expense ratio ranges from 0.35% – 1.17% per annum of the total assets.

Liquidity – Gold ETFs scores over SGBs when it comes to liquidity. Investors can enter/exit from Gold ETF during any working day of the stock exchanges. Liquidity will not be the constraint (though impact cost may be a hurdle) for the Gold ETF. On the other hand, the encashment/redemption of the Sovereign Gold bond is allowed after the fifth year from the date of issue on coupon payment dates. However, these bonds will be tradable on Exchanges, if held in demat form (but, liquidity may be limited).

Taxation – No capital gains tax is payable if the sovereign gold bonds are held till maturity, while ETFs held for more than three years attract capital gains tax (with indexation benefits).

Comparison among Sovereign Gold Bonds, Physical Gold, and Gold ETF: