There are two types of Gold investors, those who like to own physical gold and those who are happy with paper gold because they just want the returns.
Up till now, for investors in non-physical gold, Gold funds were the most logical and hassle-free choice. Now, the Central Government has a better deal for these investors.
The Union Finance Minister Shri Arun Jaitley has announced several steps for monetizing gold in Budget 2015. These are;
- Sovereign Gold Bonds Scheme – The Finance Minister announced the development of an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.
- Gold Deposit Scheme – Govt proposes to introduce ‘Gold Monetization Scheme’. This scheme will replace the existing Gold Deposit and Gold Metal Loan Schemes.
- Gold coins with Ashok Chakra – Government will also introduce Indian Gold Coin, which will carry the Ashok Chakra on its face. This may help in reducing the demand for coins minted outside India and also help to recycle the gold available in the country.
The Central Cabinet has recently approved the above schemes and issued detailed guidelines on these Gold Schemes. The main objective of these schemes is to curb gold imports and, at the same time, develop bullion / gold as an asset class in India.
In this post, let us understand about – What is Sovereign Gold Bonds Scheme (SGB)? What are the key features or highlights of Gold Bonds? What is the interest rate offered on Gold Bonds? Is Gold Bonds Scheme a good investment option?
What is Sovereign Gold Bonds Scheme?
Sovereign Gold Bond Scheme is an indirect way of investing in Gold. Instead of buying Physical Gold, investors can invest in gold in a paper form through Sovereign Gold Bond Scheme. The under-lying asset for these bonds is Gold. These bonds will track the price of gold, plus an extra interest earning on top of that.
Gold Bonds Scheme: Features & Highlights
- Who will issue Sovereign Gold Bonds? – Bonds will be issued on behalf of the Government of India by RBI (Reserve Bank of India). These will be marketed through Post Offices / Banks / NBFCs (Non-banking Finance Companies) and by various brokers/agents (including National Saving Certificate (NSC) agents) who will be paid a commission. Bonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents. Commission for distribution shall be paid at the rate of 1% of the subscription amount.
- Who can buy Gold Bonds? – The sale of bonds would be restricted to Resident Indians / Resident Indian entities (HUFs, trusts, Universities, charitable institutions) only. So, NRIs (Non-Resident Indians) are not eligible to subscribe to Gold Bonds Schemes.
- How to buy Sovereign Gold Bonds? The Bonds will be made available both in Demat and Physical (paper) form. Gold Bonds will be issued on payment of Rupees and denominated in grams of Gold. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
- Can a Minor invest in SGB? – Yes. The application on behalf of the minor has to be made by his / her guardian.
- Is it necessary for me to apply through my bank? – It is not necessary for you to apply through the bank where you have an account. You can apply through another bank or Post Office also.
- What is the minimum permissible investment in Gold bonds? Minimum permissible investment will be 1 unit (i.e. 1 gram of gold).
- Based on the Govt’s borrowing requirements, Gold Bonds will be issued in ‘Tranches’. (What is Tranche? – A Tranche refers to a single issue of a security released at different times. For example, the Govt may announce that it intends to issue Rs 1,000 cr in Gold Bonds in two TRANCHES of say Rs 500 cr.)
- The Gold bonds will be issued in denominations of 2, 5, 10, 50, 100, 500 grams of Gold. The cap (maximum limit) on Bonds that may be bought by an entity or an individual would be not more than 500 gms per person per fiscal year. A self-declaration to this effect will be obtained.
- Can I invest as a Joint-holder? Yes, in case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.
- How frequently Gold bonds will be issued? The Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification.
- What is the Gold Bonds’s Issue price ? Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).
- What is the rate of Interest on Gold Bonds? – The Govt will issue Gold Bonds with a rate of interest after taking into account the domestic and international Gold market conditions. So, the interest rate offered can vary from one tranche (Issue) to another. The investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.
- Interest earned on Gold Bonds is Taxable.
- How is interest calculated? – The interest amount is calculated on the value of the gold in rupee terms.
- What is the tenor / duration of Gold Bond? – The tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates. So, the lock-in period on Sovereign Gold Bonds is 5 years.
- What is the mod of investment? Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft.
- Can I hold Sovereign Gold Bonds in Dmat form? The investors will be issued a Stock/Holding Certificate. The Bonds are eligible for conversion into demat form.
- Do I need to submit any KYC documents to buy Gold bonds? Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.
- Can I get loans on Gold Bonds? – Bonds can be used as collateral for loans. The LTV (Loan to Value) is to be set equal to ordinary Gold loan as mandated by RBI from time to time.
- Is Pre-mature withdrawal allowed? – Gold Bonds will be listed on Stock Exchanges to allow early exits.
- What the redemption rules on Gold bonds? – On maturity, the redemption is allowed in Rupee amount only. The principal amount of investment, which is denominated in grams of Gold will be redeemed at the prices of gold at that time. So, if gold prices have been appreciated then you can get the capital appreciation on the invested amount plus interest payment. The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA.
- Can I extend the Tenor of the bond? – If the price of Gold has fallen from the time of investment was made, or for any reason then the depositor (Bond holder) will be given an option to roll over (extend) the bond tenure for 3 or more years.
- What is the main risk associated with Gold Bonds Scheme? – The investors will need to be aware of the volatility in Gold Prices. Though the scheme is guaranteed by the Government, do remember that you can get negative returns on your investment based on Gold price movements.
- Do I need to pay any charges to buy Gold Bonds? – As an investor, you do not have to pay any charges / fees.
- Government will maintain ‘Gold Reserve Fund’ to take care of risk of increase in Gold prices which will be borne by the Govt itself.
- Can I gift bonds? – The bond can be gifted/transferable to a relative/friend/anybody.
Sovereign Gold Bonds Scheme & Tax Implications
The Capital Gains tax treatment on Gold Bonds is proposed to be the same as for Physical Gold for an individual investor.
- According to the Budget 2016 proposals, gold bonds will be exempted from capital gains (LTCG) tax at the time of redemption. So, if you hold the bonds till the maturity date and if you make any long term capital gains when redeeming your gold bonds, there will not be any capital gain taxes on the profit you make.
- Kindly note that Long term capital gains arising to any person on sale or transfer of SGB will continue to be taxable and eligible for indexation benefits. You need to hold the Gold Bonds for at least three years to be termed as ‘Long Term Capital Asset’. The LTCG (Long Term Capital Gains) if any is taxed at 20% with indexation.
- If you redeem bonds before completion of 36 months (3 years), you have to pay tax on STCG (Short Term Capital gains) which is as per your Income Tax slab.
- The interest on Gold Bonds shall be taxable. TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.
Should you invest in Sovereign Gold Bonds? – My Opinion
The main benefit of Gold bonds is you may get capital appreciation (if gold prices increase) plus ‘interest payment’ on bonds. If you buy physical gold or Gold ETFs (which also track gold prices), you may get capital appreciation only. Neither physical gold, gold mutual funds nor gold ETFs pay any interest rate.
Latest News on Gold Bond Public Issues
- (09-October-2017) : Latest Gold Bonds issue Oct to Dec 2017. For more details, you may kindly read this article..
- (25-February-2017) : Gold Bonds Issue Feb 2017. The Govt has proposed to offer 7th Tranche of Sovereign Gold Bonds in Feb 2017. The Applications for the 7th Tranche of Gold bonds will be accepted from February 27 to March 3, 2017. The Bonds will be issued on 17th Mar, 2017.
- (21-October-2016) : Gold Bonds FY 2016-17 – Latest Public Issue – Applications for the proposed sixth tranche of ‘Sovereign Gold Bonds Scheme’ will be accepted from 24th October, 2016 to 2nd November, 2016. The Gold bonds will be issued on 17th November, 2016. The Issue price has been fixed as Rs 3,007 per gram. However, the Govt has decided to issue the Gold bonds at a discounted price of Rs 2,957 per gram (a discount of Rs 50).
- (31-August-2016) : Gold Bonds FY 2016-17 – Public Issue – Applications for the proposed Fifth tranche of ‘Sovereign Gold Bonds Scheme’ will be accepted from 1st September, 2016 to 9th Sep, 2016. The Gold bonds will be issued on 23rd Sep, 2016. The issue date of the Sovereign Gold Bonds has been shifted from 23rd September,2016 to 30th September, 2016. (Posted on 23-Sep-2016)
- (18-July-2016) : Applications for Fourth tranche of ‘Sovereign Gold Bonds’ will be accepted from 18th July to 22nd July, 2016 (1st issue in Financial Year 2016-17). The bonds will be issued on 5th August, 2016. Click here to read the latest article on Gold Bonds.
- (05-March-2016) : Applications for Third tranche of ‘Sovereign Gold Bonds’ will be accepted from 8th March to 14th March, 2016. The bonds will be issued on 29th March, 2016.
- (15-Jan-2016) : Applications for Second tranche of ‘Sovereign Gold Bonds’ will be accepted from 18th Jan to 22nd Jan, 2016. The bonds will be issued on 8th Feb.
- (03-Nov-2015) : RBI fixes Gold Bonds Issue Price at Rs 2,684 per gram.
- (30-Oct-2015) : Govt fixes ‘Interest rate’ on Gold bonds at 2.75% . These gold bonds will be sold through Banks & Post Offices.
If you buy Gold mutual funds or Gold ETFs, you have to bear ‘fund management charges’. In case of Gold bonds, no charges are applicable. Also, like gold funds and ETFs, you don’t have to worry about storage of physical gold or pay locker fees in case of Gold Bonds.
The biggest disadvantage of Gold bonds is lack of liquidity. The proposed tenor is around 5 to 7 years. So, if you want to exit bonds before the maturity date, the only option is you have to redeem them through the exchanges. So, we need to wait and watch the extent of trading of these bonds on National Stock Exchanges. (Do note that you can redeem gold mutual funds and get the redemption amount in 2 to 3 days).
In India, most of us prefer buying physical gold to paper gold. It would be very challenging to make individuals switch from buying physical gold to a paper which promises gold like returns.
I believe that liquidity, tax treatment, rate of interest and marketing efforts to reach out the rural investors could be the deciding factors for the success of Gold Bonds Scheme. Also, Gold bonds scheme may turn out to be successful when compared to Gold Deposit or Monetization Scheme.
Personally, I have never invested in Gold. The extent of volatility of Gold prices in the recent years is more than that of Equity securities. So, the risk-reward ratio is certainly not in favor of investing in Gold.
However, if you would like to invest a portion of your savings in Gold for long-term, Gold bonds Scheme may outscore the Gold funds / physical gold.
Do you expect Gold Bonds Scheme to be a game changer? Will this scheme reduce Gold imports? Kindly share your views and comments.
(Picture courtesy : The new Indian Express. Reference : PIB) (Featured Image courtesy of Master isolated images at FreeDigitalPhotos.net)
Very general purpose. Not gving any additional knowledge than what 99.99% people who invested in SGB are alreadyu aware. Need to be more focused
This article was first published way back in 2015, at that time, SGB was new and not many people were aware of its features 🙂
Sir we have purchased GOLD BONDS. Its half yearly interest received in our OBC Bank A/C. Now OBC bank merged with PNB bank & hence change its bank name. From 01-04-2021 its IFSC code also be changed. Please intimate that, gold bond interest from 30-03-21 will be deposited automatically in new Merge bank or we have to do something. Thanks. R K Agrawal, mob. 088266455**
Dear Mr Agrawal,
Suggest you to visit the concerned branch office where you have purchased the Bonds and can get the account details updated ..
Sir,this is Srikanth I buy SGB from SBI on 08/07/2020 but until now I didn’t get bond by email r bank, so pls give a advice to get SGB certificate,I had only the order I.D accepted by the SBI BANK.
Suggest you to kindly contact your banker
Sovereign gold bonds come with a maturity period of 8 years, with an exit option from the fifth year. Sovereign gold bonds are also traded on stock exchanges within a fortnight of issuance, offering an early exit option for investors though liquidity is poor here.
I have purchased SGB on feb 2016 through ICICI bank, the bond certificate has wrong spelling of my name, not received any interest since start till AOD.
How can i rectify the spell mistake on bond and what about Interest due/
Dear Amey..You may kindly contact your banker reg. this..
I have purchased SGB from SBI on 20/07/2016 but till date I have not received any kind of Bond certificate except a application no as acknowledgement receipt signed by the BR Manager of SBI
Can you help me to get certificate of SGB. How I will proceed.
You can visit the respective bank branch and ask for a print-out of SGB bond certificates.
You can provide the application/ack number to them.
Pls. tell me where and how can I redeemed my SGB after completing the 8 year. Kindly explainthe process.
I believe that one month before the maturity date you will receive an intimation on your mobile/email about maturity date/amount.
On the date of maturity, the maturity proceeds will be credited to the bank account as per the details submitted by you in Application form.
In case there are changes in any details, such as, account number, email ids, then you must intimate the bank/PO promptly.
Again a very good article from you.
I do have a questions regarding this,
I want to avoid the tax on the interest, so can I purchase the bond in the name of my wife ( not working) or kid ?
So what is the best option to avoid the tax ,Buying the bond in my wife’s name through my account
or wife’s account?
It will then be treated as a GIFT.
However, any income generated by such gift given to spouse, will be clubbed to your income and taxable.
Read : Gifts & tax implications.
I am big reader of your blogs. I am from medical side so i lack knowledge of economy . But i gained alot from your blogs. Your honest approach attract alot. Keep it man.
I want to start sip whether i choose online /offline mode. Give me some idea regarding investment too.
Dr. Shashikant Bhardwaj
Dear Shashikant ..Thank you for your appreciation!
May I know your financial goals/objectives and time-frame??
Kindly read below articles:
How to create a solid investment plan?
List of articles on key aspects of Personal Financial Planning.
List of investment options in India!
I am an ardent reader of your articles, which come into my mail box. Great effort! Do you provide personal income tax return filing support. I need some profession help this FY (2015-16) please.
Dear Ashok Ji,
Thank you for following my Blog.
We do not provide IT Filing services.
If possible you can post your queries, will surely try to resolve them.
Sir thanks for a very informative article would like to understand say I invest today @ of 3200/gm for 10 gm. I have to pay 32000 and after 5 years I want to redeem and the value of the gold is then 2900/gm what will I get as return to my investment
You have to redeem at Rs 2900 per gram, so in this case it is negative returns.
Your article was honest and really honest
Keep writing because there are readers like me who like Genuine opinion, articles
Thank you dear Vinu..Will surely try to keep writing 🙂
Kindly share the articles with your friends.
In 70s, i think the GOI issued gold bonds and gave back physical Gold of 999 fineness. But now the GOI is having “heads I win ,tail I lose” policy. But in all such investments, the inflation and the income tax on the low interest rate takes away the shine in the scheme.
Article is informative.I have one question weather on maturity of gold bonds if an investor wants physical gold equivalent to the maturity amount will Govt agree to it?
Dear Manohar..No, physical gold will not be given. On maturity, the redemption is allowed in Rupee amount only.
The Bonds will be issued on November 26,2015 for which application will be accepted from 5 Nov-20 Nov,
Bonds will be denominated in grams with a basic unit of 1 gm.
Tenor will be 8 Years but can be cashed after 5 Years
Minimum 2 gm and maximum 500 gm per person per year.
2.75 Interest will be payable per annum
Interest will be taxable.
Thank you for sharing these inputs. In-fact I was updating the article with the same details and at the same time I received your comment.
Gold Bond going to be very very good instrument for saving specially for those who want to invest in physical gold for over a time period
if i invest in 100 gm gold bond today i’ll get after 5 year money equivalent of 115 gm(approx)
it will be win win situation for me my gold will keep on increasing and i don’t have to bother for price rise in future
i’ll invest something for my daughter’s marriage
PS:- i have already SSA account for her
I have 3 laks amt.csn u pls guide me for best investment for good teturns
I am already doing sip on mfs