We’ll always have a bit of confusion with regards to certain bonds issued by the government, about its eligibility criteria, risk, return, maturity period, redemption, tradability, taxation, and so on. In this article, we are going to discuss the sovereign gold bond scheme and answer some common FAQs related to it. After reading this article you will be able to know, are this sovereign gold bond scheme is beneficial for you in terms of investing?
What is Sovereign Gold Bond and who is the issuer?
SGB’s are government security Bonds issued by RBI on behalf of the Government. It is denominated in grams of gold which replaces the Physical gold for holding. The investor at the time of purchase has to be paid an issue price at cash itself, then the investor can redeem the bond in cash at the time of maturity.
What are the benefits of buying SGB rather than physical gold?
An Investor can redeem the bonds at an ongoing market price at the time of its maturity or premature redemption. The SGB is a good alternative for holding gold Physically. The storage cost and the risk associated with the physical gold can be eliminated. The investors are very well known for its periodic interest and its market price at the time of its maturity. The gold in jewellery forms has certain charges like making charges and purity charges, but this will get eliminated for SGB. SGB is held in RBI’s Book or in Demat form, which avoids the risk of scrip.
Are there any risks associated with SGB while investing?
If the market price of gold gets declines at any period after the purchase, then there will be a risk of capital loss, but the investor will not lose the units of gold which he had paid.
Eligibility criteria for investing in SGBs?
SGB is open to everyone who is a resident of India as specified by the Foreign Exchange Management Act, 1999. Individuals, HUFs, trusts, universities, and charity institutions are all eligible investors. Individual investors who switch from resident to non-resident status may keep their SGB until they are redeemed or mature early.
What is the SGB’s Annual Ceiling limit for the investment?
The minimum investment in the Bond is one gram, with a maximum subscription limit of four kilograms for individuals and Hindu Undivided Families (HUF), twenty kilograms for trusts and similar entities as determined by the government from time to time per fiscal year (April – March). The limit applies to the first applicant in the case of joint holding. The annual ceiling will apply to bonds purchased from the government’s initial issuance, as well as from the secondary market. If any SGB is submitted as collateral in any bank, then such SGB will get exempted while determining the annual ceiling limit.
What could be the rate of interest and how will it get paid to investors?
An Investor will get the interest at the rate of 2.50 percent per (Fixed rate) annum on the initial investment amount and it gets credited into the bank account semi-annually. At the time of Maturity, the last interest will get paid along with the principal amount.
What could be the selling price of SGB and its Redemption value?
The bonds are sold or redeemed at the price of the nominal value of the gold bonds, which shall be on the basis of the average price of gold of 999 purity, which is published by Indian bullion and jewellers association limited, for the last 3 business days, which preceding to the subscription period. At the time of redemption, an investor’s bank account will be credited with both interest and redemption proceeds.
Can investors redeem the bond at any time?
The bond gets matured only after 8 years from the date of issuance, for redemption. If an investor wants to redeem early, then it can be done after the 5th year from the date of issue of bond. If an investor holds SGB in Demat form, then it can be tradable through Exchanges, and also it can transfer to any other investor who fulfills the eligibility criteria.
Is it possible to use SGB as collateral for bank loans?
These securities can be used as collateral for banks, financial institutions, and non-banking financial company loans (NBFC). The Loan to Value Ratio shall be the same as that prescribed by RBI for conventional gold loans from time to time. Granting a loan against SGBs would be subject to the bank’s/financing agency’s discretion, and it could not be inferred as a matter of right.
What are the tax implications of SGB in terms of its interest and capital gain?
The interest on the bonds will be taxable in accordance with the provisions of the Income-tax Act of 1961. The capital gains tax on SGB redemptions to individuals has been eliminated. Long-term capital gains arising from the transfer of a bond will be eligible for indexation benefits.
TDS does not apply to the bond. However, it is the bondholder’s responsibility to follow tax laws.
Can SGB held in Demat form?
Bonds can be kept in a Demat account. A specific request must be made directly on the application form. The bonds will remain on the RBI’s books until the dematerialization process is complete. Following the bond’s allotment, the option to convert to demat will be available.
Is it possible for me to trade SGBs?
The bonds will be traded on a date to be announced by the RBI. (It should be noted that only de-mat bonds held with depositories are eligible for trading on stock exchanges.) The bonds can also be sold and transferred pursuant to the provisions of the Government Securities Act, 2006. Bonds can also be transferred partially.
Conclusion
Sovereign Gold Bond Scheme is the perfect substitute for holding Physical gold. We also understand that there are so many advantages and benefits for the bonds in terms of safety, gold denomination, flexibility and transferability, purity, maturity, premature withdrawal, loan collateral, tradability, and so on. So, from this, we can understand that the bond is very much beneficial for investors.
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