SGB: Sovereign Gold Bond

For Indians, the reverence they have for gold is beyond its market value. 

We buy gold in the form of jewelry paying hefty making and wastage charges, when we try to sell the same during tough times, we always get ¾th the market price. 

If we try to buy gold in the form of gold bars or coins, it stays idle without earning us any benefit until we use it. Also in both the above cases of holding physical gold, there are risks and costs of storage.

If you are planning to buy or invest in gold for future purposes as an asset or for your children, buy Sovereign Gold Bonds offered by the Government of India and RBI. Here, you can own gold in a ‘certificate’ format.

Since late 2015, Sovereign Gold Bonds (SGB) guaranteed by the government of India have emerged as a veritable investment option for individual investors. RBI’s SGB scheme 2021-22 – series VII opens up this October 25, and here are the answers for all your questions related to SGBs.

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

Sovereign Gold Bonds are government securities denominated in grams of gold. They are substitutes for holding physical gold. You buy the bonds in cash and redeem them in cash on maturity. The Bond is issued by the Reserve Bank on behalf of the Government of India.

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

SGBs are government securities and are considered safe. The quantity of gold for which you pay is protected, since one receives the ongoing market price at the time of redemption/ premature redemption. 

The risks and costs of storage are eliminated. You 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 jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc. 

Are there any risks in investing in SGBs? Will you lose money in Sovereign Gold Bonds?

There may be a risk of capital loss if the market price of gold declines. However, you do not lose in terms of the units of gold which you have paid for. If you had paid for 10g of gold, on maturity you will receive 10g of gold even if the market price has increased.

Who is eligible to invest in the SGBs?

Any Indian residents- individuals, HUFs, registered entities like trusts, universities, societies and clubs, partnership firms, private or public limited companies and charitable institutions can invest in SGB.

You may also invest on behalf of a minor.

However, Non-Resident Indians (NRIs) and Foreign Institutions/Entities will not be allowed to hold gold bonds.

Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

Whether joint holding of SGB will be allowed?

Yes, joint holding is allowed.

Where can investors get the application form for SGB ?

The application form 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 this online application facility.

What are the Know-Your-Customer (KYC) norms for SGB?

Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s) and copies of address proof such as passport or driving licence or Voters ID for verification.

The unique investor ID given for each investor, is to be used for all the subsequent investments in the scheme. 

What is the tenor for SGBs?

The maturity period of the sovereign gold bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates), you will have to do early redemption.

Additionally, gold bond investors have the option of selling the bonds anytime on stock exchanges. Kindly note that in case the bonds are sold on the exchange platform, the applicable capital gains tax will be payable at the same rate as for physical gold.

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 permissible investment in the Bond is 1 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 per fiscal year (April – March), notified by the government from time to time. A self-declaration to this effect will be obtained.

In case of joint holding, the maximum limit applies to the first applicant.

The annual ceiling will include bonds subscribed under different tranches during initial issuance by the 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.

Can each member of my family buy 4Kg in their own name?

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

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.

What is the rate of interest on SGB and how will the interest be paid?

You will be surprised to know that a major benefit of the sovereign gold bond scheme is a fixed interest rate. Remember, this is over and above the gold price return. 

The Bonds bear interest at the rate of 2.50 per cent (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.  

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 Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents. By purchasing online, one can get a discount of Rs 50 per gram of gold.

If I apply, am I assured of allotment?

If you meet the eligibility criteria, produce a valid identification document and remit the application money on time, you will receive the allotment.

When will the customers be issued a Holding Certificate of SGB?

You will be issued 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 on email, if email address is provided in the application form.

Can I apply online?

Yes. You 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.

At what price the Gold bonds are sold? How much is a Gold Sovereign Bond worth? What will I get on redemption of SGB?

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

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.

How will I get the redemption amount?

Both interest and redemption amount will be credited to your bank account furnished by you at the time of buying the bond.

What are the procedures involved during redemption of SGB?

• You 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, email ids, then you must intimate the bank/SHCIL/PO promptly.

Can I encash the Gold 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.

What do I have to do if I want to exit my SGB investment?

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

Can I gift the gold 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 before maturity by execution of an instrument of transfer which is available with the issuing agents.

Can I use these SGB 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. 

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 term capital gains arising to any person on transfer of bond.

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

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

Who will provide other customer services to the investors after issuance of the gold 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.

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

Payment for the Bonds will be through cash payment (up to a maximum of Rs 20,000) or demand draft or cheque or electronic banking.

Whether nomination facility is available for these investments?

Yes, a nomination facility is available. A nomination form is available along with an 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:

       i.            the Non-Resident investor shall need to hold the security till early redemption or till maturity; and

     ii.            the interest and maturity proceeds of the investment shall not be repatriable.

Can I get the bonds in demat form?

Yes. The bonds can be held in 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 allotment of the bond.

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 demat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred. Partial transfer of bonds is also possible.

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

The nominee/nominees to the bond may approach the respective Receiving Office with their claim. In the absence of nomination, claim of the executors or administrators of the deceased holder or claim of the holder of the succession certificate (issued under Part X of 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.

Source: RBI website

Bonus:

2021-22 Series: Date of issue of SGB:

When can I buy a Sovereign gold bond in 2021 or 2022?

S.No.	Tranche	Date of Subscription	Date of Issuance
1.	2021-22 Series VII	October 25–29, 2021	November 02, 2021
2.	2021-22 Series VIII	November 29-December 03, 2021	December 07, 2021
3.	2021-22 Series IX	January 10-14, 2022	January 18, 2022
4.	2021-22 Series X	February 28-March 04, 2022	March 08, 2022

The Subscription of the Gold Bonds under this Scheme shall be open (Monday to Friday) on the dates specified above, provided that the Central Government may, with prior notice, close the Scheme at any time before the period specified above.

Comparing SGB with Physical gold Gold ETFs

Particulars	Physical Gold	Gold ETF	Sovereign Gold Bond
Returns/earnings	Lower than the real return on gold due to making charges	Less than actual return on gold	More than actual return on gold
Safety	Risk of theft, wear/tear	High	High
Purity	The purity of gold always remains a question	High as it is in electronic form	High as it is in electronic form
Gains	LTCG after three years	Long-term capital gain post after three years	LTCG post three years. (No capital gain tax if redeemed after maturity)
As loan collateral	Accepted	Not accepted	Accepted
Tradability or exit formalities	Restrictive	Tradable on Stock Exchange	Can be traded andredeemed from the 5th year with the government
Storage expenditures	High	Minimal	Minimal

SGB v/s ETF

One can argue that gold ETFs can also be held in demat form but then there is a cost aspect to gold ETFs. You normally buy gold ETFs at the prevailing unit price of gold units but there is a transaction cost each time you enter and exit. Additionally, the annual AMC cost of 1% also gets debited to the NAV of your gold ETF. SGBs, on the other hand, have no such costs loaded on to them. On the contrary, these gold bonds are normally issued by the government at a discount to the average market price, offering an added advantage.

SGB v/s physical gold

Gold is treated as a non-financial asset and hence the definition of capital gains is a holding period of 3 years in case of gold. If you sell gold within a period of 3 years then you are liable to pay short term capital gains tax at the peak rate that is applicable to you. If you sell gold after a period of 3 years, then it is classified as long-term capital gains. It will either be taxed at a rate of 10% without the benefit of indexation or at 20% with the benefit of indexation. In case of SGBs, redemption of gold bonds will be entirely tax free. (Gold bonds have a tenure of 8 years and can be redeemed after a period of 5 years). However, if the SGBs are sold in the secondary market then they will attract capital gains at the extant rates. Interest on SGBs is taxable like normal interest receipts at your applicable tax rate.

Lower Online Price: You can purchase these gold bonds at a lower price than physical gold, when applied online.

Extra Income: You can earn a guaranteed annual interest at the rate of 2.50% (on the issue price), this is the most recent fixed rate. This is a fairly important point from the investor’s point of view. Whether you hold gold in physical form or in ETF form, there is no regular assured income that you receive. You only gain if the market price of gold moves up. The SGB, on the other hand, pays an annual interest of 2.50% to investors. At least you get partially compensated for the inflation risk annually. In the meantime, if the gold prices go up, then you anyway stand to gain from the price appreciation. These bonds are also free from default risk as the interest payments and the principal redemption are guaranteed by the government of India.

Final Verdict

Who should invest in SGBs?

You may consider diversifying your portfolio with at least 8-12% gold as an ideal to give the safety net in uncertain times. However, one needs to remember that, unlike equities, gold does not create long-term wealth. 

If you are planning to buy or invest in gold for future purposes as an asset or for your children, buy Sovereign Gold Bonds: The Gold that doesn’t glitter!

(Disclaimer: The views/suggestions/advice expressed here in this article are solely my understanding. I suggest the readers consult with their investment advisers before making any financial decision.)