Sovereign Gold Bond explained
SGB - The Gold that doesn't glitter.
The Sovereign Gold Bond Scheme was introduced for the first time in November 2015 to reduce the demand for physical gold and shift a part of the domestic savings used for purchasing physical gold into financial savings.
What is Sovereign Gold Bond?
SGBs are the securities issued by the RBI on behalf the Government of India and is denominated in grams of gold.
Interest Rate Offered
SGBs offer an annual interest rate of 2.50% on the issue price, which is paid semi-annually.
SGBs comes with a maturity period of 8 years, with an option to redeem after the fifth year.
If an investor wants to exit before the lock-in period of 5 years, they can sell their dematerialised bonds on stock exchange at market price.
How Much One Can Invest?
Minimum investment of 1 gram of gold with a maximum limit of 4 kg for individuals and HUF; and 20 Kg for trusts and similar entities during the year.
Taxation of SGBs
The interest income earned on the bonds is taxed at the marginal tax rate of the investor.
The SGBs do not attract capital gains tax if held until maturity. If the bond is sold or redeemed before maturity, then the STCG is taxed as per the slab rates and LTCG tax is taxed after allowing for indexation benefits.
Benefits of Investment in SGB
SGB is considered to be less risky as it is issued by the GOI and eliminates the risk of keeping physical gold in custody.
Apart from capital appreciation, SGB also offer regular stream of income.
Unlike physical gold, there is no GST levied on SGB.
SGBs are exempted from capital gain tax on redemption at maturity.
SGB can be used as collateral for loans.
Who Should Invest in SGBs?
The Yellow Metal tend to outperform other asset classes during economic turmoil, war like situations, political unstability, etc.
Individuals with low risk appetite may choose to invest in SGB. It is one of the highest returns bearing government securities. One can also diversify their risk by investing in SGB.
Before investing in SGB, one need to consider the financial goals and time horizon for which they need to stay invested.