Sovereign Gold Bonds

Gold has been an absolute favourite investment vehicle for almost every Indian household for ages now. However, with the passage of time and generations, there is a shift in terms of modes of holding this gold( awareness about ETFs, Gold Bonds, gold funds, etc) and the proportion of gold in one’s portfolio(asset allocation) and a realistic expectation of returns from the metal. As advisors, we end up recommending some allocation towards gold for the purpose of diversification, goals like marriage expenses, sometimes just for hedging against inflation and the likes. The mode of holding such gold depends on a lot of factors including availability of funds, sources of such funds, ultimate use for the gold, taxation, personal preferences, etc.

While we may have a preferred way that we suggest our clients to hold gold in, we must be up-to-date with the various avenues available to do the same. This article talks about the Sovereign Gold Bonds that the RBI issues from time to time and aims to discuss the suitability of it for different needs.

  1. What is it?

SGBs are bonds denominated in grams of gold (1 bond=1 gram) and issued periodically by the RBI. There are tranches that are announced every 6 months and these bonds end up being issued almost once every 1-2 months. The subscription is open for these fresh issues for about 5 days every tranche, and investors are free to apply for these through their banks, brokers, mutual fund distributors, etc. There are online and offline ways to apply for this and there is flexibility to hold them in demat as well as physical form. Most people opt for Demat form and the RBI also seems to be pushing for this mode. The price at which these bonds are sold is the three business days’ average price of gold of 999 purity, the week before subscription opens. These bonds also additionally pay an annual interest to the bond holder. The bonds come with an 8 years maturity with an option to redeem pre-maturely after the 5th year.

  2.  What are some unique benefits of SGB over other modes of holding gold?

  • Firstly, the access to 999 purity gold(not literal gold, but the price of the bonds are linked to the price of 999 purity gold directly) with almost no additional costs like GST, storage costs, making charges, etc. The allotment, as well as redemption prices of these bonds, are both derived in a very standard way, leaving no room for ambiguity.
  • Secondly, an annual interest of 2.5% is paid to the bondholders over and above any capital appreciation they may benefit from due to movement in gold prices. This is paid out semi-annually directly into the investor’s bank account.
  • Thirdly, if these bonds are held till maturity, there is no capital gains tax applicable on the same.
  • Fourthly, there is flexibility to buy these bonds in single units, whereby the investor can literally choose to invest in one gram of gold every few months, fitting all wallet sizes.
  • Lastly, applying for these bonds and making payment online gives a discount of Rs. 50 per gram to the investor, adding marginally to their future returns.
  • Additionally, these bonds can be pledged for margin requirements with the exchange, thereby making good use of money that is locked in these bonds.

3. Who is this investment suitable for?

  • Investors looking at holding the investment up to maturity, i.e. 8 years. While there is an option to redeem the bonds post 5 years, the tax benefit is available only if the bonds are held till maturity. And while the bonds can be traded on the exchange before 5 years, the volumes traded are extremely low and cannot be counted as a dependable way to liquidate the investment.
  • Investors who actually need gold in their portfolios. These bonds are an alternative way of holding gold, not an alternative to other asset classes.
  • Investors who can digest price movements in gold. This is not an alternative to other fixed income investments.

4. What are some common misconceptions about SGBs?

  • They can never give negative returns: This is untrue. While the probability of this is negligible, these are linked to gold prices that are subject to fluctuations in either direction and hence one cannot assume that the investment will never dip in value.
  • They can be sold back to the RBI anytime: This is not the case. Redemption of these bonds with the RBI is possible only after the 5th Liquidation before that needs to be done only via the exchange, where too, the liquidity is very low.
  • The tax benefit is unconditional: No. The waiver of tax on capital gains made on these bonds is granted only if the bonds are held till maturity, i.e. 8 years. Any sale/redemption even a day earlier, will subject any gains to tax.
  • Interest on SGBs is tax exempt: The interest paid on these bonds is fully taxable as per the investor’s slab rate.
  • No capping on purchase quantity: The annual capping per investor for SGB is 4kgs of gold per year. This limit is for individuals and HUFs. For others, this limit is 20kgs.

5. What should we do?

  • Assess the existing asset allocation of our clients and map them against their goals.
  • Assess the need for non-goal-linked gold in their portfolio for reasons like diversification, inflation-hedging, event-risk management, etc.
  • Assess the sources and nature of money to be used for these investments.
  • Assess the suitability of features like time horizon, liquidity, etc for our clients.
  • If all boxes are checked, one can look at recommending these to clients.
  • Adding this as a product offering is also sure to enable another income vertical to our practice.

For more details, visit the FAQs on the RBI website.