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New sovereign gold bond issue opens: Should you invest in it?

Wed Sep 11 2019



A new tranche of the sovereign gold bond issue opened on Monday with the price fixed at Rs 3,890 per gm. The government has decided to offer a discount of Rs 50 per gm for investors applying online and paying through digital mode for the bond purchase.


The issue will close on September 13.


The sovereign gold bond scheme was launched in November 2015 with the objective of reducing demand for physical gold and shift a part of the domestic savings that had gone into purchase of the yellow metal into financial savings.


But does the sovereign gold bond work better for you than any other gold investment options? Here’s a detailed review.



Interest Rate: When you invest in these bonds, besides the benefit that accrue to you from the appreciation in gold price, these bonds offer an interest rate of 2.50 per annum payable semi-annually. The interest gets credited semi-annually to the investor’s bank account.



Subscription Limit: The minimum investment limit for these bonds is one gram with a maximum limit of subscription of 500 gm per person per financial year (April-March). The maximum limit of subscription is 4 kg for an individual and Hindu undivided family (HUF) and 20 kg for trusts and similar entities per financial year.



Who Can Invest in Them: The sale of the bonds is restricted to resident Indian entities including individuals, HUFs, trusts, universities and charitable institutions.


Exit Option: The tenure of the bond is eight years with exit option from the fifth year from the date of issue on every interest payment date.


Redemption Price: Redemption of SGBs takes place at the prevailing gold price based on previous week’s simple average of closing price of gold. The investor receives the value of the bond plus capital appreciation or depreciation from the increase or decrease in gold price.


Liquidity: These bonds are mandatory listed on BSE and NSE ensuring liquidity in the secondary market.


Taxation: There is no capital gains tax on SGBs if held till maturity. However, if the bonds are sold before the maturity date through the exchanges, then this exemption is not applicable. If gold bonds are sold within three years of purchase, then it is considered short-term gain. Such gains, if any, will be clubbed with total income of the investor and taxed at the income-tax rates applicable to his income slab. On the other hand, long-term gains will be taxed at 20.80 per cent (with indexation benefits).


SGBs Vs ETFs: Sovereign gold bonds hold sovereign guarantee, hence there is no default risk is involved. In the case of gold ETF too, the credit risk is minimal. Investors have to bear the transaction charges if they want to trade in gold ETF, while there is no such charge involved with SGB if they don’t exit through the exchanges. Further, gold ETFs deduct some charges in the name of TER (total expenses ratio) from total assets, which ranges from 0.99 to 1.2 per cent per annum.