Sovereign Gold Bond – Best Tax-Free Gold Investment option by RBI with 2.5% interest; SGB vs Digital Gold vs Physical Gold

 Sovereign Gold Bond (SGB) is a Gold investment scheme launched in November 2015 by the Government of India with the objective to reduce the demand for physical gold and shift a part of the domestic savings, used for the purchase of gold, into financial savings. 

      In this article, we’ll tell you everything you should know about SGB, its Pros, Cons and how you can invest in it.

Firstly we will discuss the three most common of Gold Investment :

1. Physical Gold

2. Digital Gold

3. Sovereign Gold Bond

Earlier we used to buy Physical Gold & store it for years, transferring from Generation to Generation. We buy this type of Gold from jewellers of 22, 23 or 24 carat. Let’s see its benifits & limitations :

 Pros :

> You can wear it as jewelry or an ornament.

> It’s a type of investment that you can sell during an emergency.

Cons :

> We have to bear the cost of GST for buying Physical Gold.

> We have to buy Gold for at least 500-1000 Rs.

> Making Charges are also imposed on buying Physical Gold.

> Security of Physical Gold is our responsibility.

> It’s Taxable.

> No income other than Capital Gain.

> Quality & purity of Gold is also a concern.

Then after the rise of Digital Era, people start investing in Digital Gold which they find better as compared to Physical Gold. Some of the cons of Physical Gold were solved by Digital Gold & some were still there. Let’s see its features & limitations :

Pros :

> It’s a type of investment that you can sell during an emergency.

> You can even buy Digital Gold worth Rs. 10 

> Quality & Purity is not a concern because it is authorized by markings & you can also liquidate it any time i.e. Redeem money instead of Gold.

> Its security is not your headache since you’re not gonna keep it with you (it will be stored in secured vaults).

> Zero Making charges.

> You can buy or sell it online without going somewhere out.

Cons :

> You can’t wear it since it will be stored in vaults.

> You have to pay GST while buying Digital Gold.

> It’s Taxable.

> No income other than Capital Gain.

Both Physical & Digital Gold have their Pros & Cons, then Sovereign Gold Bond came into the picture. SGB solved many cons of Digital & Physical Gold. Government of India launched it in November 2015 for a better Gold investment purpose & an objective to reduce demand of Physical Gold.

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SGB also has its Pros & Cons, Let’s understand them in detail with help of some questions & answers :

Q. What is SGB?

A. SGB is a scheme of GOI in which RBI on behalf of Govt. issues Gold Bonds for a maturity period of 8 years. In SGB you get 2.5 % interest annually on the face value of Gold.

Q. What is the eligibility to buy SGB?

A. You should be an Indian resident having a bank A/C

Q. Who issues SGB?

A. Reserve Bank of India (RBI) on behalf of GOI

Q. What are the various risks involved in buying SGB?

A. Since this scheme is provided by Center Government so there is as such no major risks. The only risk is of capital depreciation i.e. if the value of Gold will decline in the upcoming years, your capital value will also decrease, although there will be no loss in terms of quantity of Gold.

But chances of such a condition are rare because as per the previous years’ chart pattern of Gold, it has never given a negative return in long term….it keeps on increasing. 

Q. What is the maturity period of SGB?

A. This bond comes with an 8 years maturity period with an exit option from the end of the 5th year.

Q. What is the minimum & maximum quantity of SGB one can buy?

A. In the case of individuals 1 gm(1 unit) is the minimum quantity & 4 Kg(4000 units) is the maximum limit. Whereas a trust or organization can buy a minimum of 1 gm(1 unit) & maximum of 20 Kg(20000 units).

Q. How much interest I will get on these bonds?

A. You will get 2.5 % simple interest on this Bond annually. It is applied at face value. For example, suppose you bought gold worth Rs. 10000, so you will get 2.5 % interest/year on 10000 rupees in two phases(1.25 % in every 6 months) .

Q. Will I get Physical Gold on redemption of the bond?

A. No, you’ll not get the physical gold on redemption but instead you will get the value of Gold in money.

    Suppose you bought 20 units of SGB in Jan 2020 worth Rs. 1 lakh, so you will get 2.5 % interest on this gold every year + money worth value of Gold in Jan 2028.

Q. At what rate these bonds will be issued to me?

A. RBI sets an issue price of SGB a few days before its sale by calculating the average gold rate of the last three days.

Q. Is SGB taxable?

A. Well if you hold SGB for 8 years & redeem after that then you have to pay Zero Tax on the Capital Gain but if you exit before 8 years it’ll be taxable as per your Income Tax category.

Q. Is the 2.5 % interest taxable?

A. Yes, it is.

Q. What is the option if I need money before 5 years?

A. Here comes the advantage of SGB, if you need money before 5 year time period, you can sell these bonds on stock exchanges like NSE & BSE to get money. For this, your bond should be stored in your Demat account of CDSL & NSDL.

Q. Does these bonds be used as collateral for taking a Loan?

A. Yes, you can use these bonds as collateral for taking loans.

Q. Can I use SGB for saving Tax?

A. Yes you can.

Q. Can I transfer these bonds to my relative or a friend ?

A. Yes, you can transfer these bonds anytime through either a Demat account & bank. But certain taxes are imposed on the transfer of Bonds.

Q. Can two or more persons jointly hold SGB?

A. Yes, SGB can be held by multiple persons & nominees.  

Q. How can we buy SGB?

A. You can buy it with both online & offline methods. You can get it through the bank(offline) & bank’s net banking(RBI SGB sale approved banks), and some stock brokers. It is gonna trade on stock exchanges like NSE & BSE.

Q. When I can apply for the SGB?

A. Earlier RBI used to host SGB sales quarterly, but now it’s hosted monthly or once in two months.

Pros of SGB :

> It’s a kind of financial investment that you can sell anytime in the secondary markets.

> You can invest in SGB with small funds i.e. 1 gm or 1 unit of gold.

> Quality & Purity is not a concern because you’ll never get Physical Gold.

> No headache of security of Gold.

> Zero making charges involved.

> You can buy or sell it online without going somewhere out.

> You will get 2.5 % interest/annum as passive income.

> SGB can be used as collateral for taking loans.

> You can use these bonds to save Income Tax.

> Capital Gain is Tax-free if redeemed on maturity.

> No GST on buying SGB.

> Rs. 50 discount/gram if payment is made online.

Cons of SGB :

> You can’t wear it or keep it as Physical Gold.

> It is bonded/locked for a time period of 8 years (Pre-mature Exit option available).

> You can’t buy less than 1 gm of Gold.

> It has low financial liquidity as compared to physical & digital gold.

> SGB sale comes for a limited time during the year.

     If you want Gold to use as jewelry then you should go for Physical Gold but if you want Gold for investment for a short time you can go for Digital Gold and if you want tax-free gold investment & you can keep it for 5-8 years, then you should definitely go for Sovereign Gold Bond. 

 In case of buying Physical Gold, always prefer a trusted & authorized jeweler who gives you Hallmarked Gold.

     And you can buy digital gold from your bank’s net banking & through some broker’s apps.

Conclusion: So we believe that from all the above discussions, now you can wisely choose the best Gold investment option for you according to your preferences.

Q. How to buy Sovereign Gold Bond?

A. SGB can be bought with net banking & from stock exchanges as per the tranche(date) given by RBI. 

Q. Does banks & stock exchanges charges commission for buying Sovereign Gold Bond?

A. Banks & Exchanges do not charge any commission from you for buying Sovereign Gold Bond. 

Q. After how many days of buying a Sovereign Gold Bond, the shares will be allotted in the Demat account?

A. Shares of SGB are usually credited in Demat AC within two weeks of applying.

Q. How can I get a sovereign gold bond purchase certificate online?

A. Usually it is delivered to you digitally through E-mail provided by you in the application form. But, if you do not receive it even after 2 weeks of purchase then you can send an email to Ekuber(RBI) through their official website. You can also contact your bank/broker in the meantime. 

If you want to invest in Sovereign Gold Bond, Digital Gold, Indian & US Stocks, Mutual funds, IPO, FD’s, SIP then you can use Groww App. Account opening in Groww is completely free. If you find Groww useful then you can join it : Visit Groww

Some General FAQs (source-RBI):

1. What is Sovereign Gold Bond (SGB)? Who is the issuer?

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of the Government of India.

2. Why should I buy SGB rather than physical gold? What are the benefits?

The quantity of gold for which the investor pays is protected since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewelry form. The bonds are held in the books of the RBI or in Demat form eliminating the risk of loss of scrip etc.

3. Are there any risks in investing in SGBs?

There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold that he has paid for.

4. Who is eligible to invest in the SGBs?

A person resident in India as defined under Foreign Exchange Management Act, 1999 is eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, and charitable institutions. Individual investors with subsequent changes in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

5. Whether joint holding will be allowed?

Yes, joint holding is allowed.

6. Can a Minor invest in SGB?

Yes. The application on behalf of the minor has to be made by his/her guardian.

7. Where can investors get the application form?

The application will be provided by the issuing banks/SHCIL offices/designated Post Offices/agents. It can also be downloaded from the RBI’s website. Banks may also provide online application facilities.

8. What are the Know-Your-Customer (KYC) norms?

Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s).

9. Can an investor hold more than one investor ID for subscribing to the Sovereign Gold Bond?

No. An investor can have only one unique investor Id linked to any of the prescribed identification documents. The unique investor ID is to be used for all the subsequent investments in the scheme. For holding securities in dematerialized form, quoting of PAN in the application form is mandatory.

10. What is the minimum and maximum limit for investment?

The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). In the case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market. The ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions

11. Can each member of my family buy 4 kg in their own name?

Yes, each family member can buy the bonds in his/her own name if they satisfy the eligibility criteria.

12. Can an investor/trust buy 4 Kg/20 Kg worth of SGB every year?

Yes. An investor/trust can buy 4 Kg/20 Kg worth of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis.

13. Is the maximum limit of 4 Kg applicable in the case of joint holding?

The maximum limit will be applicable to the first applicant in case of a joint holding for that specific application.

14. What is the rate of interest and how will the interest be paid?

The Bonds bear interest at the rate of 2.50 percent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

15. Who are the authorized agencies selling the SGBs?

Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding corporations of India Ltd. (SHCIL), and authorized stock exchanges either directly or through their agents.

16. If I apply, am I assured of allotment?

If the customer meets the eligibility criteria, produces a valid identification document, and remits the application money on time, he/she will receive the allotment.

17. When will the customers be issued Holding Certificate?

The customers will be issued a Certificate of Holding on the date of issuance of the SGB. Certificate of Holding can be collected from the issuing banks/SHCIL offices/Post Offices/Designated stock exchanges/agents or obtained directly from RBI by email if the email address is provided in the application form.

18. Can I apply online?

Yes. A customer can apply online through the website of the listed scheduled commercial banks. The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.

19. At what price the bonds are sold?

The nominal value of Gold Bonds shall be in Indian Rupees fixed on the basis of a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period.

20. Will RBI publish the rate of gold applicable every day?

The price of gold for the relevant tranche will be published on the RBI website two days before the issue opens.

21. What will I get on redemption?

On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

22. How will I get the redemption amount?

Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond.

23. What are the procedures involved during redemption?

  • The investor will be advised one month before maturity regarding the ensuing maturity of the bond.
  • On the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record.
  • In case there are changes in any details, such as account number, or email ids, then the investor must intimate the bank/SHCIL/PO promptly.

24. Can I encash the bond anytime I want? Is premature redemption allowed?

Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year from the date of issue on coupon payment dates. The bond will be tradable on Exchanges if held in Demat form. It can also be transferred to any other eligible investor.

25. What do I have to do if I want to exit my investment?

In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

26. Can I gift the bonds to a relative or friend on some occasion?

The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria. The Bonds shall be transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer which is available with the issuing agents.

27. Can I use these securities as collateral for loans?

Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions, and Non-Banking Financial Companies (NBFC). The Loan to Value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time. Granting loans against SGBs would be subject to the decision of the bank/financing agency, and cannot be inferred as a matter of right.

28. What are the tax implications on i) interest and ii) capital gain?

Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

29. Is tax deducted at source (TDS) applicable on the bond?

TDS is not applicable to the bond. However, it is the responsibility of the bondholder to comply with the tax laws.

30. Who will provide other customer services to the investors after the issuance of the bonds?

The issuing banks/SHCIL offices/Post Offices/Designated stock exchanges/agents through which these securities have been purchased will provide other customer services such as change of address, early redemption, nomination, grievance redressal, transfer applications, etc.

31. What are the payment options for investing in Sovereign Gold Bonds?

Payment can be made through cash (up to ₹ 20000)/cheques/demand drafts/electronic fund transfers.

32. Whether nomination facility is available for these investments?

Yes, the nomination facility is available as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form is available along with the Application form. An individual Non – resident Indian may get the security transferred in his name on account of his being a nominee of a deceased investor provided that:

  1. the Non-Resident investor shall need to hold the security till early redemption or till maturity; and
  2. the interest and maturity proceeds of the investment shall not be repatriable.

33. Can I get the bonds in Demat form?

Yes. The bonds can be held in the Demat account. A specific request for the same must be made in the application form itself.

Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to Demat will also be available subsequent to the allotment of the bond.

34. Can I trade these bonds?

The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred as per provisions of the Government Securities Act, 2006. Partial transfer of bonds is also possible.

35. What is the procedure to be followed in the eventuality of the death of an investor?

The nominee/nominees to the bond may approach the respective Receiving Office with their claim. The claim of the nominee/nominees will be recognized in terms of the provision of the Government Securities Act, 2006 read with Chapter III of Government Securities Regulation, 2007. In the absence of nomination, a claim of the executors or administrators of the deceased holder or a claim of the holder of the succession certificate (issued under Part X of the Indian Succession Act) may be submitted to the Receiving Offices/Depository. It may be noted that the above provisions are applicable in the case of a deceased minor investor also. The title of the bond in such cases too will pass to the person fulfilling the criteria laid down in Government Securities Act, 2006, and not necessarily to the Natural Guardian.

36. Can I get part repayment of these bonds at the time of exercising the put option?

Yes, part holdings can be redeemed in multiples of one gm.

37. How do I contact RBI to address my queries regarding Sovereign Gold Bond?

A dedicated e-mail has been created by the Reserve Bank of India to receive queries from members of the public on Sovereign Gold Bonds. Investors can mail their queries to this email id.

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