Alongside China, India is by far the world’s largest importer and consumer of gold. Gold is one of the most preferred investments in India. With over 95% of Gold being imported, the yellow metal turns adverse to India’s forex reserve. To address this problem, Government of India launched Sovereign Gold Bonds (SGBs) in 2015 under the ambit of the Gold Monetisation Scheme.
The objective of the scheme was to cut down the demand for physical gold and shift a part of the domestic savings (used for the purchase of gold) into financial savings.
SGBs are government backed securities, issued by the Reserve Bank of India (RBI) on behalf of the Indian government. Investors have to pay the issue price and the bonds will be redeemed upon maturity.
How to buy Gold Bonds?
SGBs can be ordered through the Net-banking option of banks, from designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) or even through authorized stock exchanges. Investors can also download the application from RBI’s website or through bank sites.
Who can invest through SGBs?
“Residents” in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGBs. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. Joint holding is allowed in SGBs. For minors, the application has to be made by his/her guardian(s).
Can NRIs invest in SGBs?
Only residents of India are eligible to invest in SGBs. Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGBs until early redemption/maturity.
SGBs vs Physical gold
SGB vs Gold
- SGBs offer a superior alternative to holding gold in physical form since the risks & costs of storage are eliminated. SGBs are free from issues such as making charges and purity in the case of gold held in the form of jewelry.
- The flip side of SGBs is their fixed lock-in period. SGBs are issued for a fixed term of eight years with an option to redeem them from the fifth year onwards at the RBI buyback window.
- Also, if gold bonds are sold prematurely on the stock exchange before three years, then they will attract short-term capital gains tax (STCG) as per the investor’s slab rate. But if they are sold after three years, then long-term capital gains tax (LTCG) of 20 per cent will be applicable, and the investor will also get indexation benefits. And, if one were to hold the bonds until maturity, or until the RBI buyback window, then capital gains tax will not be applied.
Price of Sovereign gold bond
The Reserve Bank of India (RBI) fixes the issue price per gram for each tranche by calculating the simple average of the closing prices of 999 purity gold as disclosed by Indian Bullion and Jewellers Association (IBJA) on the last three working days before the week marked for the subscription.
Our Take
Buying gold jewelry isn’t an investment. But if the idea is to remain invested in Gold, then SGB is the best option in the market. Along with capital gains, investors are paid interest rate. NO GST during purchase and NO Capital gains tax on sale. And also, India need not shell out dollars from its reserve. It’s a win-win situation.