Sovereign Gold Bond Scheme

With the latest tranche of Sovereign Gold Bond Scheme open for subscription between December 28th 2020 to January 1st 2021, many of my friends were asking me about this scheme. So, I did some research and decided to write a post for others, explaining the features of Sovereign Gold Bond and all that is required for investing in them, starting from the benefits, eligibility, withdrawal, and tax liability on withdrawal.

We Indians have a different kind of obsession with Gold. In almost all the middle and upper class households, we can see that a significant portion of the investments are in the form of Gold. Well, why wouldn’t we? Gold has given decent returns over the last few decades. Our parents still buy (and recommend us to buy) physical gold with a view that the price will increase and they would get a good return for their investments. When the overall market is down, the price of gold shoots up. So, gold is also seen as a safe form of investment.

Sovereign Gold Bond FinanceNerd

The problem with buying physical gold

  1. Security: Storing physical gold in home carries risk of theft or burglary.
  2. Storage cost: If we don’t wish to store gold at home, we have the option of storing our gold assets in bank lockers which carries extra cost.
  3. Making Charges: We lose a significant portion of our investment (normally up to 15%) as making charges, even when we buy gold biscuits.

Moreover, gold is not an income generating asset. The return you get on your investment in gold is based entirely on the price appreciation, and you don’t get any regular income on your investment.

In November 2015, the Government launched the first issue of Sovereign Gold Bonds. This is issued by the Reserve Bank of India on behalf of the Government of India. It overcomes the risks (mentioned above) which are there with investing in physical gold. Let us see the details of this Bond.

What is Sovereign Gold Bond?

Sovereign Gold Bonds are government securities which can be bought in units of gold. You pay the issue price at the time of buying and you can sell it at the market rate at the time of maturity. This is the exact same as investing in physical Gold. If at the time of maturity the price of Gold increases, your investment value increases, and vice versa. The government sells this bond via the RBI several times in an year. You are given a time window (4-5 days) to subscribe to the bond. Once you invest, you need to hold the bond till maturity (8 years). Pre-mature withdrawals are allowed from 5th year also. Let us see more details about this offering

Benefits of Sovereign Gold Bond

  1. The returns are linked to market rate of physical gold. If the gold price at the time of purchase is Rs 4,000/gm and that at the time of maturity is Rs 10,000/gm, you gain Rs 6,000 per gram straight. No other hidden charges.
  2. You get 2.5% interest for holding the bond every year. Note: This amount is based on the monetary amount invested, and not gold units. So, if you invest Rs 40,000 today, you’ll receive Rs 1,000 as interest every year in your bank account, irrespective of the price of gold.
  3. The gold is stored in digital form. Hence, there is no risk of losing your investment.
  4. There is no storage cost since the gold is stored digitally.
  5. There are no making charges.

Features

Eligibility

Only resident Indian entities, which includes: Individuals, HUFs, Trusts, Universities and Charitable Institutions are allowed to invest in Sovereign Gold Bond.

Amount of investment

  • For individuals/HUFs: 1 gm to 4 kg of gold every year
  • For others: 1 gm to 20 kg of gold every year

Bond Maturity

8 years

Interest rate

An interest of 2.5% on the initial investment will be paid every year. The interest is credited into your linked bank account once every 6 months.

Redemption of Sovereign Gold Bond

At the time of maturity

At the time of maturity, you get the value of the amount of gold you hold credited into your bank account. The rate which you get per gram is the simple average of the closing price of Gold of 999 purity for the previous 3 working days published by the India Bullion and Jewellers Association Limited.

Before Maturity

You can also redeem your bond after the end of 5th year. However, there is an applicable tax on early redemption of the bond mentioned in the below section

Tax on Sovereign Gold Bond

On the interest received every year

The interest received every year falls under ‘Income from Other Sources’ and is taxable according to the tax slab of the investor.

At the time of maturity

The capital gain at the time of maturity will be completely exempted from tax.

On pre-mature redemption

The capital gain will be taxed as ‘Long term capital gain’ and will get indexation benefits.

An Example

Assuming current gold price (average for last 3 days): Rs 4,000/gm and the Gold price after 8 years from now (average for last 3 days): Rs 10,000/gm. I’m also assuming that I fall in the 30% tax slab.

Suppose I have Rs 1L to invest today and I subscribe to the Sovereign Gold Bond today for 25 grams of Gold, my cashflow over the period of 8 years would be:

  • Starting the end of first year till the end of the 8th year, Rs 1,250 would be credited to my linked bank account every 6 months. I would have to pay Rs 750 (+ Rs 30 as cess) as income tax on this interest I earned.
  • At the end of the 8th year, I would get Rs 2,50,000 as the maturity amount (Rs 10,000 * 25 units of gold) which will be completely tax free.

Summary

For those who believe in the return of gold, the Sovereign Gold bond seems a better investment method over physical gold, firstly because you don’t lose a good amount in form of making and storage charges, and secondly, you get regular income in the form of interest which increases the overall return by a little. So if you are planning to invest in gold coins (or any other form of physical gold) just for the capital gain, you should consider investing in Sovereign Gold Bond instead. Personally, I don’t prefer investing in Gold since I’m more of an equity person.

These bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents. You can reach out to any of them with your KYC documents (ID proof and address proof) and apply for the Bond.

I hope you liked the article. If you have any questions related to the article, please let me know in the below comments. If you have any feedback or need any help in any topics related to finance, you can contact me using the Contact me section of this website.

To read more posts about personal finance and Credit Cards, please visit FinanceNerd blog page.

Stay Happy, keep investing!! 

4 thoughts on “Sovereign Gold Bond Scheme”

    1. Hi Rishi!
      Historically, whenever there is a fall in market, people start investing in gold seeing it as a safe investment and hence, the price increases. This time also, in march there was a sudden big crash in the stock market and hence we saw the sudden rise in gold prices. After the market recovered, the price decreased a little. A speculation is that the market will see a good correction in the coming time and hence, gold price might shoot up again then. But personally, I don’t see gold as a competitor to equity over long term, so I stay away from it.

      Instead, I buy equity when market is down. This time also in march I started buying shares of few companies I had in my wish list since sometime. Some of them are currently trading at approx. 3x from the buying price (so much much better returns than gold 😁😁).

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