Let’s talk about a smart way to invest in gold – through Sovereign Gold Bonds. Indians are the largest consumers of gold. Yet again, this year gold imports have surpassed the previous year by a substantial margin. In the month of September 2021 itself, we imported $5.11 billion worth of gold.
Our penchant for gold is multidimensional. It represents generational wealth to be passed down, it’s a sign of status, it’s a store of value. Gold jewellery is the Indian women’s primary choice of ornament. Gold is a part of our culture that is hard to shake out.
Why RBI came out with Sovereign Gold Bonds?
Ironically, India does not have any gold reserves. All the supply to meet this insatiable demand needs to be imported. This is not a logistical issue. However, it impacts the macro fundamentals of the economy and has a bearing on our total import bill, and consequently on our currency.
To address some of these issues, the Government of India proposed the issuance of Sovereign Gold Bonds (SGB), via our central bank – RBI.
This is like paper gold. While, you won’t be able to wear it to a wedding, in the long run you get the same value as you would had you held on to physical gold. While you gain from change in gold prices, the Government doesn’t have to worry about a large import bill.
How do Sovereign Gold Bonds work and how can you apply for them?
The SGB is a bond issued by the RBI. To equate it to an investment in gold, the face value of the bond is set at the current price of gold whenever the bonds are launched. RBI launches new series of SGBs periodically for individuals to invest.
You can apply for any of the open SGB issues through your bank or post office. You can also apply online as well through stock exchanges. The bonds come with an eight-year maturity. However, there is an early exit possibility after five years too.
The subscription upper limit for each individual is up to a value of 4 kgs of gold and the minimum can be 1 gram of gold. At redemption, you receive the market value of gold at that time.
This is a scheme that the Government has structured keeping in mind the interests of individual investors.
It is your way to invest in gold for the benefit of its price change and at the same time not have to deal with all kinds of inefficiencies linked to buying physical gold.
The cherry on the pie is the 2.5% annual interest that RBI will pay every six months to bond holders. Not only do you get the capital gain from gold investing but also you receive an interest payment for subscribing to the bonds.
Moreover, these bonds are listed and tradable on stock exchanges, which means you can have a secondary market exit if you so desire, before the tenure is up. However, you should ideally choose Sovereign Gold Bonds only if you are willing to hold the bonds till maturity.
But are Sovereign Gold Bonds for you?
If you are busy storing up gold jewellery or bars and coins for the next generation, be mindful that the lure of this yellow metal has declined as generations progress.
However, gold as a store of value over years and decades is undeniable. It may not give you the kind of edge that risk assets do, but there is an expectation of capital safety and growth to match inflation.
Gold bonds are perfect if you want to add that inflation hedge in your long term investment portfolio. If you are accumulating physical gold for your next generation, even there this bond can serve as an interim mechanism; time your purchase such that the bond matures closer to your goal of gifting gold.
One other advantage over physical gold here is the fact that you don’t pay any GST on buying an SGB. Otherwise, you pay 3% as GST on physical gold purchases. There is also talk of this number going up to 5% according to various news sources.
This paper investment is not an obvious status symbol. Accumulated savings invested in these, however, can definitely work towards creating generational wealth to pass on to your children and grandchildren.
Taxation of Gold Bonds
The interest you receive through SGBs will be taxed as per your existing tax slab. However, one key advantage here is that the capital gains component, thanks to an increase in the price of gold, is tax-free. From a long term holding and capital gains tax perspective, thus, SGBs do come with certain advantages not found in other forms of gold investments.
Sovereign Gold bonds let you take advantage of the decadal price rise in gold while at the same time offering low cost, flexibility and liquidity which is missing when it comes to investing in physical gold.
Want to apply for the latest tranche of SGBs to add a gold allocation to your portfolio? Here's how Scripbox can help you with this.