A good investment portfolio is one which is well diversified so that it can maintain our returns even in the ups and downs of the market. In such a diversified portfolio, fixed income instruments or safe instruments play a major role and when it comes to safe investment, the name of gold definitely comes in it. Usually, people keep gold physically in a locker or at home, but there is a risk of it being stolen or lost. In such a situation, apart from buying physical gold, there is another way of investing in it which is called Sovereign Gold Bond. This investment scheme is being run by RBI in which we can get higher returns than without buying actual gold. In today’s article, we will try to give you complete information about SGB i.e. Sovereign Gold Bond.
What is Sovereign Gold Bond?
Sovereign Gold Bond is a gold investment scheme run by the Government of India and RBI which was first launched in November 2015. Through this, we can invest in paper form without buying actual gold. In return for the investment made in it, we get a holding certificate issued by RBI.
The value of SGB is linked to physical gold and its returns also change with the increase and decrease in its price. Along with returns linked to the gold price, the investor also gets the benefit of a fixed interest rate of 2.5 per annum. This interest is paid half yearly. The maturity period of SGB is 8 years but it can be redeemed even after the lock in period of 5 years. This is a better way of investment than physical gold in which one does not have to bear the fear of gold being stolen and the cost of handling it.
Features of Sovereign Gold Bond
Secure Investment: Sovereign Gold Bonds are issued by the Government of India and RBI, hence returns are guaranteed and there is no risk of default.
Fixed Interest: In Sovereign Gold Bond, apart from the price appreciation of gold, you also get the benefit of a fixed interest rate which is 2.5 per annum. This interest amount is paid half yearly.
Investment in low amount: Sovereign Gold Bond can be purchased in minimum 1 gram gold denomination.
Fixed lock-in and maturity period: The maturity period of Sovereign Gold Bond is 8 years but after 5 years when its interest amount payment date is due, you can sell it.
Loan: Just like physical gold, you can take a loan from a bank or financial institution against your SGB investment.
How to invest in Sovereign Gold Bond?
RBI opens sovereign gold bonds for investment in tranches. Its new series is opened for subscription every 2 or 3 months, during which only investors can bid to buy it. This subscription usually remains open for a week. In exchange for investing in these, the investor is issued a certificate which is stored physically or in a demat account.
We can easily buy Sovereign Gold Bond both online and offline. These are mainly made available for investment in banks, stock holding corporations, post offices and stock exchanges. You can submit the application as per the required format at these places for offline purchase. You can use your net banking to buy Sovereign Gold Bond online. For this :
- First of all log in to your internet banking account.
- Go to e-services and select Sovereign Gold Bond.
- After reading the terms and conditions, click on the proceed option.
- Fill the registration form and click on the submit button.
- Fill the nominee and the quantity you want to buy in the purchase form.
- After verifying all the details, submit the form.
The certificate of SGB purchased through online mode is stored in your demat account. If you have purchased SGB through offline mode, the certificate is sent to your email ID and you can also collect it from the branch of the bank or institution from which you purchased it. Apart from this, you can also invest in SGB through your online brokers like zerodha and groww.
Investment limit in Sovereign gold bond
You can invest in minimum 1 gram of gold in Sovereign Gold. The price of buying 1 gram of gold will be the rate declared at the time of issue of 1 gram of gold. Talking about the maximum amount, a citizen or HUF can invest maximum 4 kg in gold bonds at one time. For charitable, organizations and trusts etc. this limit is 20 kg.
Return in Sovereign Gold Bond
The price of Sovereign Gold Bond is driven by the price of real gold. The price of Sovereign Gold Bond increases or decreases with the change in the price of gold. Apart from this, there is the benefit of additional interest rate of 2.5 on gold bonds which is paid half yearly for 8 years. This interest amount is directly credited to your bank account.
Benefits of Sovereign Gold Bond
Safety and Security: Sovereign Gold Bond is a scheme backed by the Government of India and RBI, hence there is complete guarantee of safety and returns in it.
Liquidity: Unlike physical gold, SGB can be traded in the secondary market i.e. stock exchange. After the lock-in period is over, investors can trade them in the stock exchange.
Tax Benefit: If SGB is held till maturity, the capital gain received is completely tax free, further increasing your investment returns.
No worries about storage: Compared to physical gold which requires a separate safe place to store, SGB can be easily stored in paper form or demat form. Apart from this, you can easily buy them online and on purchasing this way you also get a separate discount of Rs 50.
Interest Income: In SGB, you get the benefit of appreciation in gold price as well as a fixed interest income of 2.5%. This interest is calculated annually and is paid half yearly.
Disadvantages of Sovereign Gold Bond – Sovereign gold bond ke disadvantages
Lock in period: The maturity period of Sovereign Gold Bond is 8 years and any kind of partial withdrawal can be taken only after 5 years. Therefore, it is not suitable for people interested in short term investments.
Investment Limitation: You can invest in SGB only when its fresh tranche is opened for subscription. This tranche is opened for investment at an interval of one or two months, so we may have to wait a long time to invest in it.
Gold Linked Returns: The returns received from SGB are linked to the price of physical gold. If the price of gold decreases due to economic factors, it can also reduce your investment returns.
Taxation on Sovereign gold bond
We have to pay tax on interest income from Sovereign Gold Bond as per our income tax slab. While filing income tax return, we have to declare it in the income from other source category and the tax rate is applicable according to which category we fall in. If you hold SGB till maturity, then you do not have to pay any capital gains tax. Capital gains tax will be applicable only if you sell them before maturity i.e. 8 years. Apart from this, we get the benefit of indexation benefit on SGB investment. If the investor holds SGB for a period of more than 3 years, he can claim indexation benefit on the income tax return.
Conclusion
Investing in SGB is a good alternative to investing in physical gold. It not only removes the hassles related to storage and safety of your gold but also gives higher returns than real gold. Although it has many benefits, yet due to lock-in period and taxation on returns, it does not meet the investment needs of many people. If these two things are left aside, then overall we can say that SGB is a great and easy way to invest in gold and diversify your portfolio.
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