The Sovereign Gold Bond (SGB) is a government-backed scheme that allows investors to earn market-linked returns as well as interest at a rate of 2.5 percent without having to physically own the yellow metal. The Reserve Bank of India (RBI) issues gold bonds on behalf of the Government of India under the scheme.
Each bond unit is equivalent to one gram of gold with a purity value of 99.9 percent. Simply put, each unit of Sovereign Gold Bond is worth the value of one gram of the precious metal at the highest degree of purity.
Here is a brief history of Sovereign Gold Bonds (SGB) and some important details you should know about the scheme:
When was the SGB plan launched?
The sovereign gold bond scheme was launched on November 5, 2015 by Prime Minister Narendra Modi.
Was it the only such plan launched?
The government introduced the sovereign gold bond scheme along with two other schemes: the gold monetization scheme and Indian gold coins.
What is the objective of the SGB plan and the other two gold plans?
The three instruments, including gold bonds, share the common objective of monetizing around 20,000 tonnes of gold available in the country in physical form.
The gold available in the country should be put towards productive use, Prime Minister Modi said on the day of launching the plans.
Have you heard of the expression ‘sone pe suhaga’?
All three schemes were described as examples of ‘sone pe suhaga’ by none other than Prime Minister Modi himself.
Here are some of the important things you should know about sovereign gold bonds:
Who can invest in the plan?
Individuals, undivided Hindu families, trusts, universities and charities can invest in the gold bond scheme, subject to applicable limits.
Can NRIs also invest in SGB?
No. Only residential citizens can invest in SGB. However, individual investors who change their residential status from resident to non-resident may continue to hold SGB until redemption or maturity.
Are Sovereign Gold Bonds available all year round?
No. Sovereign Gold Bonds are open to subscription in tranches. The Government of India decides to issue SGB in consultation with the RBI.
Is there any investment limit applicable to Sovereign Gold Bonds?
While individuals and HUFs can purchase gold bonds equivalent to four kilograms of gold (4,000 units) each in a financial year, for trusts and similar institutions, a limit of 20 kilograms per financial year applies.
What happens in case of co-ownership of gold bonds?
In such cases, the limit applies to the first applicant.
Are gold bonds also traded in the secondary market?
Why should we opt for sovereign gold bonds as an investment avenue instead of physical gold?
The RBI has answered this question in quite detail.
The SGB offers a superior alternative to holding gold in physical form, according to the central bank’s website, rbi.org.in.
Here are some important points highlighted by the RBI:
- The investor receives the market price prevailing at the time of the redemption/premature redemption, so the amount of gold, for which the investor pays, is protected.
- Storage risks and costs are eliminated.
- The investor is assured of the market value of gold at the time of maturity and periodic interest.
- SGB is free from issues like charges and purity in case of gold in the form of jewellery.
- The bonds are held on the books of the RBI or in demat form, eliminating the risk of loss of securities etc.
Is there any risk involved in SGB scheme?
“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,” according to the RBI portal.
Gold bonds mature in eight years. However, early repayment is possible after five years under certain conditions.
What is the interest rate applicable to SGB investments and how often is it paid?
The gold bonds earn interest at a fixed rate of 2.5 percent per year on the initial investment amount. Interest is credited to the investor’s bank account semi-annually.
Investors ordering gold bonds online are eligible to avail a discount of Rs 50 per unit on the condition that they make the payment through digital mode.
Are there other advantages of investing in Sovereign Gold Bonds?
“Upon maturity, any capital gains arising due to holding Sovereign Gold Bonds in your portfolio are tax-free. In case of holding physical gold, in the form of gold bar or biscuit, you have to bear certain additional costs to And for those who only buy gold for investment purposes, SGB is a good tool,” Manoj Kumar Jain, head of commodity and forex research at Prithvi Finmart, told Zeebiz.com.