Sovereign Gold Bonds
Sep 02, 2020
What are Sovereign Gold Bonds?
Say you wanted to invest in Gold. You go to your local jeweler and buy a gold coin. You keep the coin for 8 years and then sell it back to the jeweler at the prevailing market rate. You make a profit or a loss on this transaction based on gold price change over the years.
Now imagine the same scenario with the Government(RBI) being the jeweler. You buy a gold bond from the government, keep it for 8 years and sell it back to the government. You make a profit or a loss based on the gold price change over the years.
Sovereign Gold Bonds are issued in multiples of 1gm of gold. If the prevailing gold rate is INR 5000 per gram, then you will get 1 quantity of the Sovereign Gold Bond for INR 5000.
Why not just buy from the jeweler then you ask? Well for one, the Government sweetens the deal by also providing a recurring fixed interest component. The recent lots of Sovereign Gold Bonds have offered a 2.5% interest. There are also taxation related benefits.
Are Sovereign Gold Bonds a good investment?
If you want to invest in gold as an asset class, then Sovereign Gold Bonds provide you with the most value. Other than the gold value,
Should you buy from RBI directly or in the secondary market?
RBI offers an INR 50 per gram discount on the initial offer. The price for a Sovereign Gold Bond issue is decided based on a 3 day average of Gold 999 price before the issue.
Secondary market rates are decided by demand-supply much like the stock market. So, the price there could be lower or higher than the current gold price.
We advocate that you wait and buy in the secondary market. It takes a little time and patience if you need larger quantities. As a comparison, today's gold 999 price is 5140/gm, but you can find people selling it for 4998/gm in the secondary market.
Refer to our section on Gold Bonds to find the bond that provides you the most value in the secondary market - https://fincues.com/goldbonds.
How can you buy Sovereign Gold Bonds in the secondary market?
Sovereign Gold Bonds are listed on the exchanges. You can buy it through your Demat account if your broker supports it. Much like a stock, you will need a ticker ID that you can search for in your brokerage platform and then buy that. You should use the Scrip ID from here.
The minimum investment would need to be the price of 1gm of gold.
If you do not have a Demat account, you can open one with Zerodha by clicking here.
When can you sell a Sovereign Gold Bond?
Sovereign Gold Bonds are listed on the exchanges and so you can sell anytime. You should understand the taxation angle though.
How are Sovereign Gold Bonds taxed?
Sovereign Gold Bonds have interest and capital gain income components.
The interest component is taxable as per your income tax slab.
As for the Capital Gain component - If you hold the Sovereign Gold Bond till maturity, the capital gains tax arising on redemption of Sovereign Gold Bond to an individual has been exempted. So you do not pay any tax on capital gains in this scenario. If you sell the Sovereign Gold Bonds before the maturity period, then you will have to pay tax on the short-term or long-term capital gains. You can avail indexation benefits in case of long term capital gains. Your holding period must be more than 3 years for it to qualify as long term.
There is no tax deduction at source(TDS).
When is the interest paid?
Interest is paid twice a year at the face value.
What will be the maturity value?
Maturity value is calculated based on the average of the closing price of gold 999 purity in three previous working days.
How does a Sovereign Gold Bond compare with a Gold ETF?
Gold Exchange Traded Funds(ETF) are a way of owning paper-gold. These are listed on the exchange and you can buy them much like a stock. Gold ETFs have higher liquidity when compared to Sovereign Gold Bonds. So your entry and exit are easier. An ETF might charge you about a 1% management fee. It does not give you the extra 2.5% interest that the Sovereign Gold Bond gives you. And the gains on ETFs are taxable.
If your holding period is long, then Sovereign Gold Bonds are a no-brainer.
Can you lose your money in a Sovereign Gold Bond?
If the gold prices fall around the maturity timeframe of the Sovereign Gold Bond, then yes you can lose some money. If you bought a Sovereign Gold Bond at INR 5000 in 2020, and the gold price fell to INR 4000 in 2028(maturity year). Then you have lost INR 1000 in the Sovereign Gold Bond value. note: You would also have received about INR 1000 as the cumulative interest over the 8 years at a 2.5% rate.