Sovereign Gold Bonds Compare

Additional Useful Information

• When an investor purchases a sovereign gold bond, the issuer (government of India) is bounded by a legal contract wherein they are obligated to make the interest payments to the investor.

• Every Bond is assigned a credit rating by a credit rating agency. Higher credit ratings mean that the safety of the investment is higher, and therefore the risks involved are lower. However, lower credit means that the risks of investing in such bonds are higher. Sovereign gold bonds are of the highest credit quality since the government will never default on their obligations.

• Generally suitable for investors looking for some stable income and indirect exposure to gold.

• SGBs have an eight-year maturity period, allowing investors the flexibility to exit after the fifth year on interest payment dates.

• The fixed interest rate on SGBs is 2.5% per annum, payable semi-annually.

Returns *

• Sovereign Gold Bonds do not guarentee any returns. However, the probability of negative returns are relatively low.

• Over an eight-year period, investing in SGBs has resulted into an average return of 10% per annum. However, the interest payments are kept at 2.5% per annum so this could result in an overall return of 12.5%.

Risk Level

• Sovereign Gold Bonds are low risk investments.

• Sovereign Gold Bonds have a credit risk associated with them. This means that if the institution issuing these bonds defaults on their commitments, the investor can make losses on the investment. However, since the institution here is the government, these bonds are default free.

• Gold prices are heavily dependent on the state of the economy. In an inflationary environment, gold prices rise. It is important to analyze the state of the economy before deciding on purchasing gold.

• Other risks such as the risk of theft are eliminated.

Liquidity

• Sovereign gold bonds are illiquid.

• They can be sold at any given time prior to maturity. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds till maturity and earn the interest till maturity.

• However, an early redemption offer is available after 5 years. The investor can exit the investment on coupon paying dates.

Interesting Facts

• Unlike other unregulated forms of gold investments, sovereign gold bonds are issued and regulated by the Reserve Bank of India (RBI).

• Per individual, a minimum of 1 gram can be purchased and a maximum of 4 kg can be purchased.

• Gold is considered to be a good investment in times of market stress and economic uncertainties. It is a good inflation hedge, which means that gold prices rise in an inflationary environment.

• Gold is also considered to be auspicious in India.

• Sovereign Gold Bonds can be used as collateral against loans from banks, NBFCs and other financial institutions.

• Transaction costs are lower as compared to purchasing and selling physical gold.                                                                                    

Tax Implications

• Earnings received from Sovereign Gold Bonds are taxable.

• When investors sell Sovereign Gold Bonds prior to maturity, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).

• The tax that the investor must pay on Capital Gain is –
• Situation 1 – If the Sovereign Gold Bonds are sold within a period of 2 years from investment, the Capital Gains earned (called Short Term Capital Gains) are taxed at 20% on the gains.
• Situation 2 - If the Sovereign Gold Bonds are sold after a period of 2 years from investment, the Capital Gains earned (called Long Term Capital Gains) are taxed at 20% on the gains.

• There is no tax in case of “Capital Loss”.

• If held till maturity the capital gains are tax-free.

• Interest earned by investors from Sovereign Gold Bonds are to be added to their total taxable income and taxes are required to be paid as per the tax slab.

Where To Invest

• https://sbi.co.in/web/personal-banking/investments-deposits/govt-schemes/gold-banking/sovereign-gold-bond-scheme-sgb

• https://www.hdfcbank.com/personal/invest/bonds-and-securities/sovereign-gold-bonds