Why invest in gold sovereign bonds?
SGBs have a term of 8 years, but the scheme allows investors to exercise an option to opt for prepayment at any time after the completion of 5 years from the interest payment dates. We Indians have traditionally invested in gold. Financial planners also advise investing part of your investment fund in gold for good portfolio diversification. In recent times, Indians have invested in Gold Sovereign Bonds (SGBs) instead of physical gold due to their attractive characteristics. Lets discuss the basic features of SGB and why you should invest in these bonds. Who Can Invest in Gold Sovereign Bonds  Any individual, HUF, a trust (whether charitable or not) and any university residing in accordance with the Foreign Exchange Management Act can invest in SGB. You can also invest on behalf of a minor as a tutor. You need to have a PAN to invest in bonds. An NRI itself cannot invest in SGB but can hold bonds received as nominee from a resident investor until maturity. These bonds can be taken out through banks, joint stock companies, post offices and recognized stock exchanges. The SGB request must be made for a minimum of 1 gram and in multiples of 1 gram subject to the maximum authorized limit applicable for the category of the investor. An individual and a HUF are allowed to invest up to 4 kg in SGB in each financial year. Other eligible entities can invest up to 20 RG per year. These limits include investments made either by initial subscription or by purchases made on the stock market. SGBs can be owned individually or jointly, but the authorized limit will be calculated with reference to the first holder only. Investors can name any of them under the bonds subscribed or purchased. Duration and early repayment of SGBs  SGBs have a term of 8 years, but the scheme allows investors to exercise an option to opt for prepayment at any time after the completion of 5 years from the interest payment dates. You can have these bonds in physical form or in mat form. You can convert your farm to physical from demat at any time later or vice versa. Even during the initial 5-year lock-up period, the investor is free to sell these bonds on the stock exchange in case they need money or see price appreciation. Issue price and redemption price  SGBs are denominated in a nominal price for each gram that arrived based on the average price of gold of purity 0.999, as published by the Indian Bullion and Jewelers Association Limited (IBJA), for the last three days of the week preceding the week of issue. For the issue which opened on July 12, 2021 and closes on July 16, 2021, the issue price is set at Rs 4,807 /  per gram. There are more issues every month as announced until September 2021. Investors who apply online and pay digitally get a discount of Rs. 50 /  per gram. The redemption price of these bonds will also be calculated in the same way as the issue price. No physical delivery of gold is made at the time of redemption. SGGB investors receive an annual interest of 2.50% on the bond issue price, which is paid semi-annually. Taxation of interest and capital gains on SGB  Interest on SGB is fully taxable in the hands of investors, but profits made on redemption are fully exempt from capital gains tax. Please note that the capital gains exemption is only available for bonds repurchased from RBI and not on profits made on the stock exchange sale. Regarding SGBs sold on the stock market, you can benefit from indexation for the calculation of long-term capital gains if you have held them for more than 36 months. Alternatively, you can exercise the option of paying a 10% tax on unindexed gains on the sale of SGBs through your stockbroker for investments held for more than 36 months. Profits on bonds sold on the stock exchange before 36 months are considered short-term and taxed at the slab rate applicable to you. Since gold acts as a hedge against inflation and also provides liquidity in times of political and economic instability, one should have a portion of ones portfolio in gold. In India, gold is offered on every conceivable social occasion, especially at the time of the marriage of sons and daughters. Thus, one must continue to invest in gold in order to be able to accumulate enough gold that is readily available at the time of marriage in the family. Since investing in gold through SGB earns you interest and capital gains on redemption are tax-free, you should invest in these bonds to guard against inflation and to diversify your portfolio. (The author is a tax and investment expert and can be contacted at [email protected])