The Sovereign Gold Bond, known as SGB in short, is a newly formed scheme which is a method of investment. The scheme has been offered by the Reserve Bank of India. It is introduced by that bank on behalf of the Indian Government. These gold bonds are typically denominated in the amount of grams and these can be bought as a substitute to the physical gold. Therefore, we can call the gold bond some form of paper gold which has been backed up by the Government of India.
It is a logical decision of investment which helps to maintain and possess some assets in the form of gold. But, in case of the physical gold, it is quite difficult and bothersome to buy and maintain the gold bar, especially because there is a higher possibility of them leading wastage during the time of conversion or even theft. Therefore, the investors who are interested to own assets in the form of gold and want to invest in it, can buy the sovereign gold bonds instead of the cumbersome physical gold bars.The plus point of this sovereign gold bonds is that, the gold bonds have all the characteristic value that of the physical gold but comes in a paper format, which is easier to use and more convenient.
Physical Gold versus Sovereign Gold Bonds
The following table distinguishes between the traditional physical bars of gold and the newly introduced gold bond scheme.
Sovereign Gold Bonds |
Physical Gold |
| It is easier to redeem these bonds into physical cash. | During the time of conversion, that is, from physical gold format to cash format, some charges get levied by the purchaser or the jeweler, resulting in loss of financial value. |
| Because these bonds come in the form of paper, it is much more secure and convenient to use. There is barely any fear of damage, theft, or loss of monetary value. | The physical gold bars are risky since these are susceptible to theft and damage. Not only that, but storing them securely is very problematic as well. |
| The value of the gold bonds are generally fixed. There is no concept of purity for these paper bonds. | Physical gold bars have to tested for purity, depending on which, the value of the gold may change, even loss may occur. |
Rate of Interest paid on the Gold Bond
One of the most important benefit of obtaining a gold bond instead of the traditional physical gold is the payment of the interest fee. The holders of the sovereign gold bond will be paid an interest at the rate of 2.5 percent per year periodically on the amount of the investment done initially. But on the other hand, no interest will be paid on the holders of the physical gold. So, the holders of the gold bonds can look forward to some extra profit.
The TDS or the Tax Deducted at Source is not applicable on the holders of the gold bonds. On the other hand, the tax treat of capital gains will be similar to that for the case of physical gold. But if the gold bonds are held up to redemption, there will be an exemption of the capital gains tax from above the individuals. Meanwhile, if the gold bond gets sold by the individual before the period of redemption, they will provided with the indexation benefits for long term gains of capital which arises on the account of the one transferring.
Criteria of Eligibility of Individual buying Gold Bond
The sovereign gold bonds can be obtained by any single person who is a resident of India. It can be bought in groups of individual, or as an individual or as someone on behalf of an underage child. It is possible that the gold bond can be owned by any University or a charitable organization or any Trust. The KYC norms or the Know Your Customer norms is eligible for purchasing the bonds of gold. Therefore, the documents related to KYC, such as the Passport or TAN, the Aadhar Card or PAN and the voter ID will be necessary.
How to purchase the Gold Bond
The bonds of gold can be bought from the banks present in India. The person who is eager to invest or buy any gold bond has to do so through making a minimum investment in the bond of gold of at least one gram. There is a maximum amount of gold bond which is applicable for purchase by an individual. This limit is set at 4 kilograms for single person, 4 kilograms for HUFs and around 20 kilograms for the Trusts or other identical entities each fiscal time period (from April to March). It will be notified by the Indian Government from time to time. The yearly ceiling will be including the bonds which are subscribed following different tranches at the time of the initial permission by the Government of India and those that are bought from the Secondary Market.
How to sell the Sovereign Gold Bond
The time period of the gold bond has been set up to eight years with the option of cancellation starting from the fifth year onwards which is to be exercised on the dates of the interest payment. The selling price of those gold bonds will be set in the format of Indian rupees. Moreover, the price of redemption will be on the basis on the simplified average of the closing price of gold worth 999 purity of the former three business days starting from the date of the repayment. This has been published by the Indian Bullion and the Jewelers Association Limited.
Furthermore, on the date mentioned by the RBI, it is possible to trade the gold bonds on the stock exchanges within the span of a fortnight starting from the issuance. Therefore, it is possible to transfer or sell the gold bonds even before they reach maturity. It can be done through the execution of any instrument eligible for transfer according to the rules and regulations provided by the Securities Act of the Government.
Can the Gold Bond be pledged as the Collateral?
Yes, just like the physical gold, the sovereign gold bond can be used as some form of collateral for the loans. The ratio of LTV, that is the loan to value, has to be set equal to that of ordinary gold that has been mandated by the Reserve Bank from time to time.
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