By Dheeraj Agrawal
Communication Professional
Gold attracts all of us. As jewellery, as biscuits or bricks and as e-gold to new-age investors. But for those who want to give a golden shine to their portfolio, Sovereign Gold Bond or SGB is a good investment option. It is advisable to have around 10-15% of your portfolio in gold. Gold investments can work as a hedge, given its negative correlation with riskier assets such as equity. If you are also among those who do not want to buy gold in jewellery or its physical form but consider it an investment, Sovereign Gold Bond is the best scheme at present.
Highlights of Sovereign Gold Bond Scheme:-
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SGBs are government securities represented in grams of gold. They are substitutes for holding physical gold. The Reserve Bank issues the bond on behalf of the Government of India. When the investor redeems the SGB he/she receives the ongoing market price.
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There is no cost or storage risk. Investors are assured of the market value of gold at the time of maturity and periodical interest.
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In this scheme, any individual can buy bonds worth at least 1 gram and up to 4 kg of gold annually. The maximum purchase limit for trusts is 20 kg per year.
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The SGB matures in eight years. But after the fifth year, you will have the option to sell these bonds. You will get this opportunity two times a year when the interest on the bond will be deposited in your bank account.
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Its trading can be done on stock exchanges if held in Demat form. It can also be transferred to any other eligible investor.
The plus points of the Sovereign Gold Bond scheme:-
1) Discount on purchase
If you invest money in Sovereign Gold Bond, then you will get a discount of Rs 50 per gram in the issue price by giving an online application. That is, if you want to buy 10 grams of gold, then the savings of 500 rupees will be received instantly. You will not get such an advantage in any other scheme, whether you buy gold coins or gold ETFs.
2) No Extra Charge
You do not have to pay any extra charge on buying Sovereign Gold Bonds. While you have to pay fund management charges on Gold ETF, you have to incur expenses like making charges and GST for physical gold.
3) Interest on investment
In Sovereign Gold Bonds, you will get 2.5% interest annually from the government on the amount of gold equivalent bonds you buy. This interest will be deposited in your bank account twice a year, i.e. at intervals of 6 months. The thing to remember is that you will get this interest at the issue price. If you have bought bonds at an issue price of say Rs 5,000, you will earn interest at this price till maturity. You will not get any such interest in Gold ETF or physical gold.
4) Exemption from Capital Gains Tax
If you maintain investment in Sovereign Gold Bond till eight years of maturity, you will also get an exemption from Capital Gains Tax on its redemption. If you sell the bond before this, then you have to pay long term capital gains tax. However, you will also be given the benefit of indexation for calculating tax.
5) Collateral for Loans
SGBs serve as collateral for loans. Banks, financial institutions and Non-Banking Financial Companies (NBFC) can give you a loan on SGB as guarntee. The Loan to Value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time.
The minus points of the Sovereign Gold Bond scheme:-
Before investing in this scheme, you should know the following drawback –
1) Tax to be paid on interest
You will not get a tax rebate on the interest received in it. The interest deposited in your bank account twice a year will be considered your income, and you will have to pay tax according to your slab.
2) No liquidity in the scheme
The SGB scheme locks your money. When you invest in SGB, be ready to forget your money for eight years or for at least for five years. You are not allowed to withdraw from the Sovereign Gold Bond before five years. And even after 5 years, you will not get long-term capital gains tax exemption when you withdraw. In terms of liquidity, gold ETFs or physical gold are better than this bond.
In this scheme, the bond price will is linked to the market price of gold. If the price of gold increases, then the value of your investment will also increase. But if the price of gold decreases, you also have to be prepared for the decrease in the investment value. ‘Sovereign’ does not mean that you are getting any government guarantee on the gold price. The only guarantee is two and a half per cent interest annually.
Given all the gold pros and cons of gold investment, the sovereign gold bonds can be declared far better and beneficial than physical gold, other gold bond schemes, or gold ETFs.
