Sovereign Gold Bond Investment or SGBs – Meaning, Structure, Cost, Interest Rate, Limit, Benefits & more.Last Updated Date: Nov 17, 2022
The government has implemented various investment schemes to mobilize gold and reduce imports. One such investment scheme is SGB, Sovereign Gold Bond Investment.
What is Sovereign Gold Bond Investment?
The government launched the Sovereign Gold Bond Investment in 2015 to provide an opportunity to invest in gold as an alternative to owning physical gold.
Investors buy these bonds at a monetary value that later trade by an equal amount of physical gold.
Sovereign Gold Bonds, issued by the Reserve Bank of India on behalf of the Government of India, allows investors to get returns linked to the gold price.
The benefits of SGBs are the same as that of physical gold investment and, investors can use it as collateral for loans or trading and exchange in the stock.
How does a Gold Bond work?
Since the bonds issued by the Reserve Bank of India, the government provides a sovereign guarantee.
The bonds work in grams of gold by the investors, and the amount of issuance that is determined by the RBI in consultation of the Ministry of Finance.
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Cost of Investment in Sovereign Gold Bond
The cost of owning physical gold ranges nearly up to 25 percent. But, in Sovereign gold investment, there is no entry charge. Moreover, the scheme does not ask for fund management costs.
The government takes care of the cost involved with distribution and sales commission. So, investors do not have to pay any entry-level charge of the investment.
Rate of Interest Provided by Sovereign Gold Scheme
In the case of a sovereign gold investment bond, the government decides the Rate of interest for a particular weight of gold.
The Rate of interest derives and depends on the domestic and international market conditions and can vary from each other.
The Rate of interest solely depends on the value of gold at that period. It could be floating or fixed.
Depending on this factor, the rupee equivalent amount is converted by RBI, considering the reference rate on issue and redemption.
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Investment Limit in Sovereign Gold Bond Scheme
Investors willing to invest in SGB can consider depositing in denominations of 5, 10, 50, and 100 grams of gold. An individual may invest for up to 500 grams a year.
One thing to note here is that the issuing takes place in cash, that is, rupees but, denominated by the weight of gold in grams. Indian citizens or entities can buy the bonds capped at 500 grams.
How to Invest in Sovereign Bond Scheme?
The procedure for investment in the SGB is simple. The investors need to apply through commercial banks and post offices. They can refer an agent for the same purpose.
But, they should be NBFCs National Saving Certificate agents. The application is reviewed by the banks and post offices that are later sent to BSE and NSE by these designated offices.
Why Choose Sovereign Gold Investment Scheme?
The government has launched many schemes in favor of its citizen and economy.
SGB is one of those schemes that mobilize the idle gold from the perspective of investors and, at the same time, reduces the import by reusing it from an economic perspective.
Benefits of SGBs
Sovereign gold bonds are available for investment in both, Demat as well as a paper form. So, investors looking for international trading can opt for the paper form of gold SGBs that ease the stock exchange.
The tenure provided by the SGBs ranges from five to seven years, during which the gold units can liquidate anytime.
The government provides a guarantee on both capital invested and interest declared and accrued to the bonds.
Investors can use these bonds for collateral loans that alternatively provide a haven at times of urgency.
As mentioned above, investment in SGBs encourages trading on the exchange stock market that allows early exit to investors.
The tax treatment on capital gains is also similar to the physical gold for an individual investor and can, therefore, see no difference.
Risk Associated with Investment in SGBs
There may be a risk of capital loss if the market price of gold declines, but the investor does not lose in terms of the units of gold which they paid.
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Unlike monetization, sovereign gold investment bonds, in return, provide only cash redemption. That is in the form of cash. The Rate of interest depends on the value of gold at the time of investment.
It does not consider the latest or current Rate of interest. So, investors can make a smart choice by depending on the Rate of interest during investment.
Points to Remember while Investing in SGBs
- Joint holding of the SGBs scheme is allowed.
- The applicant can be a minor provided that the application is sent by a guardian on their behalf.
- Every application needs a KYC along with a PAN number that is a mandatory document issued by the Income Tax Department to the investors.
- Individuals can opt for one gram gold bond investment with a maximum limit of 4 kg. Whereas, trusts and other entities under government recognition can opt for a maximum limit of 20 kg gold investment under SGB.
- The maximum limit applies to the first applicant in case there is a joint holding for that specific application.
Entities who sells Sovereign Gold Bond
The government allows certain entities to conduct and practice the SGB scheme.
These include nationalized and scheduled private banks, foreign banks, designated post offices, stock holding corporation of India (SHCIL), and authorized stock exchanges.
The BSE and NSE also take charge of the SGBs and ensure that paper gold SGB investment is following all the stated regulations. Investors can also apply online through net banking facilities by respective commercial banks.
To those investors applying online, the price of the gold bonds will be INR 50 per gram lower than the nominal value during issuance. This payment is processed against the application is completed through digital mode.
One month prior to the redemption date, investors get the information regarding the maturity of their bond. On the date of maturity, the proceedings get back to their account as per details on record.
In case there are changes related to details in terms of the account number, email id, it is the investor’s responsibility to inform and intimate the banks or offices of the same.
The tax at the store or TDS is also not applicable to the bond given, that the bondholder complies with the tax laws.
Conclusion – Sovereign Gold Bond Investment
The SGBs are free from issues like making charges and purity of gold. There will be no risk and storage costs under the regulation of the government. Therefore, banks and post offices cannot impose any charges on these terms.
In the Demat form of SGB investment, bonds are in books of RBI, thereby eliminating the risk of loss of scrip, so on.
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