Should You Buy Sovereign Gold Bonds?

Investing in Gold

India is one of the world’s largest gold consumers and the Indian fondness for gold has never faded. Gold, in fact, is the most desired commodity, whether it is for a religious celebration, an important event or a marriage in the family. Some are in the habit of holding gold as a safe haven to be used for generating emergency funds. We have always maintained gold in our portfolio, usually in physical form in our lockers, whether as a means of embellishment or as an investment instrument, or possibly both. Though gold has delivered negative returns of 4.8 per cent in the last one year, in 2020 it delivered returns close to 26 per cent. It is observed that even though gold experiences spectacular years, staying dormant for a long period is its trait.

However, it does help you hedge against inflation and this is evident with the compounded annual growth rate (CAGR) of gold prices being around 8 per cent over past 51 years. What has changed over the years is that gold is no longer just a physical asset but also something that one can invest in digitally. As such, investing in gold can mean gold jewellery, gold coins and bars or even digital gold. Even when investing digitally, there are gold exchange traded funds (ETFs), gold mutual funds and sovereign gold bonds (SGBs) to consider. The only stumbling block that has not popularised digital investment in gold is the lack of awareness and the feeling of insecurity. In this article we will determine if it is worthwhile to invest in SGBs.

Investing in Gold

-Gold Jewellery
One of the classic methods in which Indians invest in gold is through gold jewellery. Because gold is seen as a prestige symbol, many individuals like wearing gold jewellery. They buy gold jewellery, wear it on a daily basis or during religious or family events, and then sell it if they want to create a new adornment or if they are short on funds.

-Gold Coins and Bars
Gold jewellery serves two functions – ornamentation and investment. However, because it has been used, the jeweller normally factors for wear and tear, which impacts the real returns that you receive. To prevent this major expenditure in gold, gold coins and bars are purchased. These gold coins and bars are frequently accompanied with a certification that attests to the authenticity and purity of the gold. The advantages of investing in gold bars or coins over gold jewellery are that the buyer does not have to pay any making fees and the jeweller does not have to account for wear and tear.

-Digital Gold
There are several risks that gold investors may encounter, such as robbery, paying deposits for lockers, and so on. However, if you want to get the benefits of gold investing without physically possessing the metal, you may invest in digital gold. Digital gold is available in the form of gold ETFs, gold mutual funds and sovereign gold bonds. As a result, you may get the benefits of investing in gold without ever possessing it physically because digital gold replicates the price of real gold. In reality, there is no price difference between digital gold and spot gold.

Sovereign Gold Bonds

What exactly are sovereign gold bonds? Government securities valued in grams of gold are known as SGBs. They serve as a substitute for genuine gold. Investors must pay the issue price in cash and the bonds must be redeemed in cash when they reach maturity. The Reserve Bank of India (RBI) issues the bonds on behalf of the Government of India. A sovereign gold bond is denominated in one-gram increments of gold. As a result, the initial investment in a SGB is one gram. These bonds are available in both physical and dematerialised form. They can be purchased from banks, stock holding corporations, post offices and recognised stock exchanges.

Eligibility for Investment

SGBs can be invested in by any individual, HUF and charitable or any other trust or university that is a resident under the Foreign Exchange Management Act (FEMA). As a guardian, one can also invest on behalf of a child. To invest in bonds, one must have a Permanent Account Number (PAN). Although a non- Indian resident (NRI) cannot invest in SGBs, he or she may keep bonds obtained as a nominee of a resident investor until maturity. In each fiscal year, an individual or a HUF may invest up to 4 kg in SGBs. Other qualifying entities, such as trusts, can invest up to 20 kg each year. These restrictions apply to investments made through initial subscriptions as well as transactions made on stock exchanges. SGBs can be held single or jointly. However, the allowable maximum will only apply to the first holder.

Premature Redemption and Tenure

SGBs have an eight-year term although the plan permits investors to elect for early redemption at any point after five years on the interest payment dates. Even during the first five-year lock-in term, the investor is able to sell the bonds on stock exchanges.

Issue and Redemption Prices

SGBs are valued in a nominal price per gram based on the average price of 0.999 purity gold announced by the Indian Bullion and Jewellers Association Limited (IBJA) for the previous three days of the week before the week of issue. The redemption price of these bonds will be determined in the same way as the issuance price. At the moment of redemption, no actual gold is delivered. SGB investors get annual interest of 2.5 per cent on the issue price of the bonds, which is paid semiannually.

Taxation

Although SGB interest is entirely taxable in the hands of investors, capital gains on redemption are completely exempt. The important point to understand here is that the exemption from capital gains applies only to bonds redeemed with the RBI and not to gains on the stock exchange transactions. If you own SGBs sold on stock exchanges for more than 36 months, you can benefit from indexation for calculating long-term capital gains. Alternatively, you can choose to pay 10 per cent tax on un-indexed gains on SGB sales through your stock broker if you have held the investment for longer than 36 months. Any capital gains realised through exchanges before the age of 36 months are considered short-term and taxed at the relevant individual slab rate.

A Wise Choice

Because gold functions as a hedge against inflation and provides liquidity during times of political and economic upheaval, it should be included in one’s portfolio. In India, gold is given on all possible social occasions, particularly during the marriage of sons and daughters. As a result, one should continue to invest in gold in order to have enough money easily available at the time of marriage in the family. Because investing in gold through SGBs offers you income and the capital gains at redemption are tax-free, you should invest in these bonds to protect yourself against inflation and diversify your portfolio. However, it should not account for more than 5-10 per cent of your whole investment portfolio.