Why are Sovereign Gold Bonds the Best Way to Invest in GOLD?

Gold has always been valuable for Indians. Whenever there is an occasion or we have to invest, we always look up to gold. This is because the price of gold increases with time and it is considered to be a safe and secure investment when compared with other options. Due to these reasons, India is the world’s second largest consumer of gold and Indian women own over 11% of the world’s gold!

In this article, we will talk about gold for investment purpose only. While the most popular form to invest is to buy physical gold, there are alternatives to this because investing in physical gold has some disadvantages. 

Drawbacks of Physical Gold:

1. Making Charges and GST- We pay making charges plus GST at the time of buying gold but when we sell it, all of this is excluded from the value of gold.
2. Purity- If we purchase gold from a local shop, then there is a risk that the gold sold to us is not 100% pure. On the other hand, if we purchase it from a branded showroom then the making charges are way too high!
3. Safety- Physical gold can be stolen, so there is a risk of theft.
4. No income is generated- When we have bought gold in physical form, it will be just kept somewhere which will generate no income. We will earn profit only when we sell it, assuming that its price has increased over time.

Other Options:

1. Digital Gold- Digital gold is a convenient and cost-effective way of purchasing gold online in small fractions (as low as ?1).
2. Gold ETF- Gold ETFs are passive investment instruments that are based on gold prices and invest in gold bullion.
3. Gold mutual funds- Gold mutual funds are open-ended investments, based on the units provided by the Gold Exchange Traded Fund.
4. Sovereign gold bonds.

What are Sovereign Gold Bonds?

1. SGBs are issued by the RBI on behalf of the Indian Government. These government securities are denominated in grams of gold.
2. RBI issues these bonds 5-6 times a year for subscription to the public. The dates for this year are shown below. Click on the image to open the website of RBI.

3. Investors have to pay the issue price and the bonds will be redeemed on maturity.

4. They can be stored in your Demat account.

Advantages of Sovereign Gold Bonds:

1. No risk of theft as they are stored in your Demat account.
2. 100% purity.
3. No making charges and GST.
4. They can be used as a collateral.
5. At the time of redemption, you will get the amount as per the value of gold at that point of time.
6. If you subscribe to this bond, you will earn interest of 2.5-3% per annum on the amount invested (principal amount).

Points to be Noted:

1. It has a lock-in period of 8 years. Although, if you don’t want to hold this bond for 8 years then you can get it redeemed before. *

*After 5 years of holding the bond from the date of issue, you can get it redeemed anytime.

2. An option for redemption before 5 years is through the stock market, but it will be taxable and the gold price in the secondary market can be low when compared with the actual price of gold, and because of this you can incur a loss.

3. No monthly investment option is available, investment can be done in lump-sum only.

4. No capital gains tax is applicable on the profit earned at the time of redemption of the bond. But the interest income will be taxable.

For example: If Kumar has subscribed to SGB in 2020 for 1 gram of gold worth ?5000. Let’s say the interest on this bond is 2.75% per annum. So, the interest earned by him will be ?137.5 a year (?5000 x 2.75%). Kumar will continue to receive interest for as long as 8 years.

Suppose the price of per gram gold in 2028 is ?25,000. Then he has earned a profit of ?20,000 (?25,000-?5000).

So, tax won’t be applied on ?20,000 but the interest received by him will be taxable. 

How to Invest?

1. Through your Bank
2. Through the Post office
3. Through Stock Holding Corporation of India Ltd. website
4. Through Stock Brokers 

It is preferred to avoid the first two options because these are offline processes and can be complicated. Use the applications available online like Zerodha to invest in SGB. In this app, there are 2 ways by which these bonds can be bought. Click on the link to know more.

Why are Sovereign Gold Bonds better than the other alternatives?

A brief comparison is shown in the worksheet below. You can open the sheet by clicking it.