The Central government recently released the calendar for Sovereign Gold Bonds (SGB) to be issued in four tranches, spanning from October 2021 to March 2022. This announcement puts a spotlight on the SGB scheme and its key features.
Overview of SGB Scheme
Launched in November 2015, the SGB scheme was designed with the aim to decrease the demand for physical gold and encourage part of the domestic savings used for purchasing gold to be redirected into financial savings. The issuance of these Gold Bonds falls under the scope of the Government Securities (GS) Act, 2006. The Reserve Bank of India (RBI) issues these bonds on behalf of the Government of India.
Distribution Network of SGBs
A broad range of institutions aid in the distribution of these gold bonds. Commercial banks, the Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges such as the National Stock Exchange of India Limited and Bombay Stock Exchange sell these bonds either directly or through agents.
Eligibility Criteria for SGBs
The sale of these bonds is limited to resident individuals, Hindu Undivided Families (HUFs), trusts, universities and charitable institutions.
Features of SGBs
Issue Price: The price of the gold bonds is tied to the price of 999 purity (24 carats) gold, which is published by the India Bullion and Jewellers Association (IBJA), Mumbai.
Investment Limit: The threshold for investing in gold bonds varies for different investors. Retail investors and HUFs can invest up to 4 kilograms (4,000 units) each during a financial year whilst trusts and similar entities have an upper limit of 20 kilograms per financial year. The minimum permissible investment is set at 1 gram of gold.
Term: The bonds have a maturity period of eight years but offer the opportunity to exit the investment after five years.
Interest Rate: A fixed interest rate of 2.5% annually applies to this scheme, payable semi-annually. As per the Income Tax Act, 1961, the interest on Gold Bonds is taxable.
Benefits of Investing in SGBs
Bonds can serve as collateral for loans. Additionally, capital gains tax arising from the redemption of SGB by an individual has been exempted. Redemption refers to the issuer buying back the bond at or before its maturity. Capital gain is the profit derived when the selling price of assets like stocks, bonds or real estate surpasses their purchase price.
Disadvantages of Investing in SGBs
Compared to physical gold that can be sold instantly, SGB is a long-term investment. Although SGBs are listed on the exchange, trading volumes are low which may make it difficult to exit before maturity.