All about Sovereign Gold Bonds (SGBs) | Key Features & Benefits

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Sovereign Gold Bond Scheme for 2020-21 is open for subscription from today. Key features and benefits of Sovereign Gold Bonds are explained in this article. Should You Invest in Sovereign Gold Bond?

Should You Invest in Sovereign Gold Bond Scheme 2020-21?

Introduction

Sovereign Gold Bond Scheme for 2020-21 is open for subscription from today. We have explained the key features and benefits of Sovereign Gold Bonds in this article. A comparative analysis of Sovereign Gold Bonds vs Physical Gold vs Gold ETF is also discussed in detail.

DIY Financial Planning by Invest Yadnya
Financial Planning by Invest Yadnya

Sovereign Gold Bond | Key Features & Benefits Explained

What are Sovereign Gold Bonds?

  • Sovereign Gold Bonds (SGBs) are Government Securities denominated in grams of Gold (linked to Gold Prices). These are the safest way to buy digital gold.
  • Government launched SGB in 2015 under the Gold Monetization Scheme. These bonds are issued by Reserve Bank of India (RBI) on behalf of Government of India.
  • Key objectives to introduce SGB scheme
    1. Bring down the demand for Physical Gold
    2. Reduce the import of Gold, which in turn will reduce India’s Trade deficit and Current Account Deficit (CAD)
    3. Shift a part of domestic savings into financial savings, by moving the investment in the form physical gold holding across the country into digital gold investment. It will result into India’s financial savings through lower gold imports and save Dollar reserves.

Sovereign Gold Bond Scheme 2020-21

  • Reserve Bank of India (RBI), on April 13, announced that it would issue SGBs FY20-21 to domestic investors in six tranches, starting April 20, 2020.
  • Rising gold prices are expected to elicit a strong response from investors.
  • The first tranche of the Sovereign Gold Bonds (SGB) scheme for 2020-21 will open for subscription from today, April 20 and the issue will close on Friday, April 24, 2020.
  • The certificate of bond(s) will be issued on April 28.
Forthcoming Issues in FY20-21

RBI is going to issue SGBs in six tranches from April 2020 to September 2020 as per the calendar specified below :

Sovereign Gold Bond Scheme 2020-21 - Forthcoming Issues in FY20-21
Sovereign Gold Bond Scheme 2020-21 – Forthcoming Issues in FY20-21
SGBs – Sales Channel
  • Sovereign Gold Bonds will be Sold through :
    1. Scheduled Commercial Banks (except Small Finance Banks &  Payment Banks)
    2. Stock Holding Corporation of India Limited (SHCIL)
    3. Designated Post Offices
    4. Recognised Stock Exchanges : NSE and BSE

Sovereign Gold Bond Scheme 2020-21 – Key Features

Sovereign Gold Bond Scheme 2020-21
Key Features of Sovereign Gold Bond Scheme 2020-21
  1. Eligibility : The Bonds will be restricted for sale to resident individuals, HUFs, Trusts, Universities and Charitable Institutions.
  2. Interest Rate : 2.50% per annum on issue price payable semi-annually
  3. Denomination : The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
  4. Minimum size : 1 unit = 1 gram of gold
  5. Maximum Limit : Maximum limit is 4 kg for individuals/HUFs and 20 kgs for trusts per fiscal year (April-March).
  6. Tenor : The tenor of the Bond is 8 years with exit option after 5th year on the interest payment dates.
  7. Issue Price : Price of the bond is fixed on the basis of simple average of closing price for gold of 999 purity of the last three business days of the week preceding the subscription period, i.e. Apr 15 – 17, 2020, published by the India Bullion and Jewellers Association Ltd (IBJA). Issue price fixed at Rs.4,639 per gram.
  8. Discount of Rs.50 per gram for online/ digital payment : The issue price is Rs.4,589 per gram for online / digital payment. At Rs.50 discount is offered to nominal value of bond.
  9. Payment Option : Cash payment (up to Rs.20,000) or demand draft or cheque or electronic banking.
  10. Issuance Form : The Gold Bonds will be issued as Government of India Stock under GS Act, 2006. Investors will be issued a Holding Certificate for the same. These Bonds are eligible for conversion into Demat form.
  11. Redemption Price : The redemption price will be in Indian Rupees based on previous 3 working days simple average of closing price of gold of 999 purity published by IBJA.
  12. Premature Redemption : From 5th  year from date of issue, Investors can go for Premature Redemption on the coupon payment dates.
  13. Collateral – Loan against Bond : Investors can use these bonds as collateral for loans. The Loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
  14. KYC Documentation : KYC norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required. Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to individuals and other entities.
  15. Tax Treatment : The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961. Capital gains tax arising on redemption of SGB to an individual has been exempted. Indexation benefits is available to LTCG arising from transfer of bond. TDS is not applicable on the bond interest/redemption proceeds
  16. Liquidity : Liquidity is available from secondary markets as these bonds are mandated to be listed on BSE and NSE. However, the liquidity of the past issues are quite low and restricted only to few tranches. Most of the past series of SGBs are trading at a discount to the gold prices due to lack of liquidity and depth in the market.
  17. Tradability : Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.

Key Benefits

  • Hassle-free Investment
    • Through Sovereign Gold Bonds, you can have an ownership of Gold without any physical possession. It also eliminates the associated risk and cost of storage, insurance etc.
  • Dual Streams of Return
    • SGBs offer dual streams of return :
      • Attractive Interest Rate : 2.5% per annum on initial investment amount and
      • Capital / Asset Appreciation Opportunity
  • Safety and Assurance of Purity
    • SGBs are safest since there is zero risk of handling physical gold. Gold bond prices are linked to price of gold of 999 purity (24 carat) published by IBJA.
  • Sovereign Guarantee
    • SGBs hold Sovereign guarantee on both Redemption Amount and Interest.
  • Tradability
    • Bonds will be tradable on stock exchanges within a fortnight of the issuance on a date as notified by the RBI.
  • Transferability
    • Bonds shall be transferable by execution of an Instrument of transfer in accordance with the provisions of the Government Securities Act.
  • Taxation
    • Capital gains tax arising on redemption of SGB exempted
    • Indexation benefits on LTCG arising from transfer of bond before maturity
    • No TDS is applicable on Interest
  • Ease of Borrowing
    • Sovereign Gold Bonds can be used as Collateral for loans from Banks, Financial Institutions and NBFCs.

Key Benefits over Physical Gold

  1. Quality Check is a major hurdle while purchasing physical gold from Jewellers. In case of SGB, No such quality check is required.
  2. No Storage / Locker / Insurance charges are payable in case of Sovereign Gold Bonds.
  3. Investors has to face Counterparty risk while selling physical holding of Gold. It is not an issue for Sovereign Gold Bonds.

Buying Digital Gold? Sovereign Gold Bonds (SGBs) Score over Gold ETF

Sovereign Gold Bonds (SGBs) Score over Gold ETF
Sovereign Gold Bonds (SGBs) Score over Gold ETF
  1. Streams of Return
    • SGBs : SGBs offers dual Streams of Return : 1.Capital Appreciation and 2.Regular Interest Income (2.5% per annum) on initial investment
    • Gold ETF : Only Capital Appreciation is there in Gold ETF, while Interest Income Benefit is not available.
  2. Default / Credit Risk
    • SGBs holds Sovereign Guarantee, hence there is No default risk.
    • In case of Gold ETF also, Credit Risk is very minimal.
  3. Expense Ratio
    • SGBs don’t charge any Management Fee.
    • Whereas in case of Gold ETF, an Expense Ratio is charged in the range 0.35%-1.14% per annum of the Total Assets, reducing the actual returns on Gold.
  4. Liquidity
    • SGBs have limited liquidity. You can encash or Redeem after 5th year. However, SGBs are tradable on Exchanges, if held in Demat form.
    • Gold ETFs are highly liquid. Here, Investors can enter/exit from Gold ETF during any working day of the stock exchanges. However, impact cost of Exit may be a hurdle.
  5. Taxation
    • In case of SGBs, there is no Capital Gains Tax if SGBs are held till Maturity. Interest on the initial investment (2.5%) is taxable.
    • Gold ETFs if held for more than 3 years attract Capital Gains Tax with Indexation Benefits.

Comparative Analysis – Sovereign Gold Bonds vs Physical Gold vs Gold ETF

Sovereign Gold Bonds vs Physical Gold vs Gold ETF
Comparing Sovereign Gold Bonds vs Physical Gold vs Gold ETF
Sovereign Gold Bonds vs Physical Gold vs Gold ETF
Sovereign Gold Bonds vs Physical Gold vs Gold ETF

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