Sovereign Gold Bond were first proposed in Budget 2015 and since then has evolved in a popular investment product. The Indian’s love for gold is well known and most of the gold is imported, it led to a huge import bills. To counter this government came with the idea of Gold bonds.
Sovereign Gold Bonds is a bond issued by Government of India and is denominated in grams of gold – which means 1 gold bond is equivalent to 1 gram of gold. The maturity period for these bonds in 8 years and you get the price of 1 gram of gold per bond in rupee terms in your account.
This has turned out to be a win-win product for both the government and the investors. The government is able to save a lot of gold imports while the investors have good gold investment alternative.
The latest Sovereign Gold Bond Issue – Series V for FY 2021-22 is available for subscription from August 9 to 13, 2021.
The Sovereign Gold Bond price would be Rs 4,790 per bond. There is discount of Rs 50 per gram (i.e. Rs 4,740) to those applying online and the payment against the application is made through digital mode.
Below is the summary of SGB features:
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Following is the schedule for issue of Sovereign Gold Bonds this year:
We have analysed all the Sovereign Gold Bonds issued till date to give you what kind of returns you can expect from the same. Till today there is just Sovereign Gold Bonds-2015-Series-I which was available for early redemption. For this the annual return has been 13.5% before tax and 12.8% after tax (30% slab). You can get more details here.
There are three parts to Gold Bond taxation:
Taxes eat a large chunk of returns that we make on investments. Keeping this in mind we have compiled list taxes applicable for most common investments in India. We cover everything from fixed deposit to stock markets to real estate.
A lot of people are confused on the way interest is calculated on Sovereign Gold Bonds. Just to reiterate these gold bonds pay interest of 2.5% every 6 months directly to the bank account. This interest is decided on the purchase price and not on the market price of the bond. Here is an example
Amit bought 1 Gold Bond for Rs 4,400 and is holding till maturity. At maturity the price of the gold bond is Rs 6,000. Below is how his cash flow would look like:
01-Jan-20 | 01-Jul-20 | 01-Jan-21 | 01-Jul-21 | Every 6 months | 01-Jan-27 | 01-Jul-27 | 31-Dec-27 | Return (XIRR) |
-4400 | 55 | 55 | 55 | 55 | 55 | 55 | 6000 + 55 | 6.18% |
If you do calculation using XIRR function in Excel (proxy of Sovereign Gold Bond Calculator), you would get 6.18% returns on this investment.
There are multiple ways you can invest in gold. You can do it by buying physical gold bars, invest in jewellery, through mutual funds, ETFs, etc. However, from gold investment perspective (& not consumption) Sovereign Gold Bond is the most preferred method because of following reasons:
You can buy Sovereign Gold Bond online through almost all government, private & foreign banks or demat accounts. In case you are not comfortable online you can visit banks, post office or buy through agents by filling up a simple form. You would need any of the following for KYC: Voter ID, Aadhaar card/PAN or TAN /Passport i.e same as for purchase of physical gold.
In case you are confused on how to buy Sovereign Gold Bond – we have done a detailed post on the same. We have step by step instructions on buying gold bonds through SBI, ICICI Bank and Reliance Money Demat. You can also get the list of all banks and post offices where these bonds are available. You should Invest through Online internet banking or demat account as its convenient and you also get a discount of Rs 50 on bond price.
Invest in sovereign Gold bonds only if you wanted to invest in gold or need gold for marriage etc in next 5 to 8 years. These bonds are efficient way of gold investment as you need not worry about purity; there is no loss of making charges and no tension about safety and storage. Additionally you get 2.5% interest every year. However you should NOT invest aggressively in gold as it would at best give inflation equivalent returns. Also remember exiting this bond mid-way through selling them on stock market might be difficult!
If you compare various ways that you can invest in gold like buying physical gold, ETFs, gold mutual funds, SGB is clearly the best way to invest in gold. But you should first decide if gold is the right investment for you. This may also be a good option to invest if you plan to buy gold jewellery after 5 to 8 years for marriage of gifts.
Sovereign Gold Bond have several advantages over traditional form of investment in gold. It pays you interest every year, the gains made are tax free. You need not worry about the purity and storage. And to top it all you can buy and sell SGB right from your home.
Yes, you can easily buy Sovereign Gold Bonds from SBI internet banking. We have step by step instructions with screenshots for buying SGB from SBI.
The capital gains made on Sovereign Gold Bond are tax free if its redeemed after 5 years. But in case it’s sold in secondary market (through stock exchange) you have to pay relevant capital gains tax.
Also, the interest received every year is taxed as per the income tax slab.
NRIs are not eligible to invest in Sovereign Gold Bonds.
Theoretically yes. All the Sovereign Gold Bonds issued till date are listed on stock exchanges. You can buy them through your Demat Account. The problem is trading volume is very low. You may not be able to get the right price or the right quantity through stock exchanges. My recommendation is as these SGB are open for subscription every month, buy from there.
Sovereign Gold Bonds can be bought in both demat and physical form. So demat account is not necessary for buying Sovereign Gold Bond.
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Hi
Thanks for this useful post. I see that there is a lot of difference in the current market price of Gold and the issue price of SGB. Could you please throw some light on this.
You are right Karan. The price of gold of 999 purity was close to 4,600 but its being offered at 4,777. May be government is trying to encash the popularity of SGP by pricing it higher. The problem is investors may loose if this price manipulation becomes a regular thing between investment and maturity.