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Sovereign Gold Bond Scheme: Meaning, benefits, expert view

The Reserve Bank of India (RBI) will open the second installment of the government-run Sovereign Gold Bond (SGB) scheme 2020-21 subscription from Monday.

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Sovereign Gold Bond Scheme: Meaning, benefits, expert view

The Reserve Bank of India (RBI) will open the second installment of the government-run Sovereign Gold Bond (SGB) scheme 2020-21 subscription from Monday.

The second installment of the sovereign gold bond scheme 2020-21 will close for subscription on May 15. The issue price of the latest gold bond scheme has been settled at 4,590 per gram while the issue date is May 19. Those applying online and making payments through digital mode will get a discount of ₹50 per gram. For such investors, the issue price of the bond will be ₹4,540 per gram of gold.

SGB investors can be individuals, trusts, universities, charitable bodies, or Hindu Undivided Families (HUFs). Last month, the central bank had said the government will issue SGBs in six tranches, beginning 20 April till September.

Here’s what investors need to know about SGB:

What is Sovereign Gold Bond?

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of the Government of India.

The bonds can be bought through scheduled commercial banks, the Stock Holding Corporation of India, the National Stock Exchange, and the BSE. The minimum amount is equivalent to a gram of gold and the maximum is 4 kg. The sovereign bonds offer a tax incentive. The capital gains arising from the appreciation in gold prices is tax-free. The interest, however, is taxed at the relevant income slab.

What are the benefits of Sovereign Gold Bond?

Higher returns: SGBs attract a 2.5% interest during the holding period which the subscribers earn over and above the appreciated price of the yellow metal making its returns higher than the actual return on gold. While making charges and taxes diminish the returns on physical gold, redeeming gold ETFs could result in lower actual returns since that is determined on the price of gold on the trading exchange on the day of sale.

No purity and storage concerns: The biggest advantage of investing in SGBs over any physical form of gold is that the former is free of any purity and storage concerns. Buying gold ornaments and coins involves the risk of impurities apart from additional costs in the form of making charges and GST on making charges which eat into the returns at the time of selling them. There’s no such worry when buying SGBs. Equally significant is the fact that physical gold always comes with the risk of being lost or stolen while storing them in a bank locker involves additional charges. SGBs are free of such concerns as these are stored in a dematerialized form.

Can be used as loan collateral: Just like physical gold, even SGBs could work as collateral for a loan from a bank, FI, or NBFC, unlike a Gold ETF investment.

SBI Customer Alert! Bank may freeze users account with incomplete KYC

How Sovereign Gold Bond can be issued?

There will be six tranches of the latest sovereign gold bond over this year. The next one opens for subscription between May 11 and May 15. The ongoing tranche has been priced at Rs 4,639 per gram, based on the average price of gold in the second half of the previous week. Those applying online and making a digital payment will get a discount of Rs 50 per gram.

Where can investors get the application form?

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 online application facility.

What will I get on redemption?

On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

The Expert View on Sovereign Gold Bond:

Gold, considered a haven asset, started rising last year amid uncertainty triggered by the trade war between the U.S. and China and buying by central banks across the world. Amid disruption by Covid-19, according to India Bullion and Jewellers Association data, it’s jumped more than 16 percent so far this year.

“In the current situation, survival becomes most important,” said Kiran Telang, a certified financial planner and SEBI-registered investment adviser. “At the moment, the priority should be liquidity. If you don’t have liquidity, you shouldn’t be looking at any investments, be it gold, debt, or equity.”

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