Government of India’s sovereign gold bond (SGB) issue 2018-19 Series V closes today. It was open for subscription from January 14 to January 18. This is a great option for conservative investors who wish to take minimum risk on their investments. If you are already late for this, another issue of SGB 2018-19 Series VI is coming up in the next month, which will be open for subscription from February 4 to February 8. Any resident Indian entities including individuals (in his capacity as individual, or on behalf of minor child, or jointly with any other individual), HUFs, Trusts, Universities and Charitable Institutions can invest in these bonds.
What are sovereign gold bonds
Sovereign gold bonds are issued by the Government of India and are a method of buying gold without physically doing so. They represent a certain quantity of gold, and on maturity, you will receive a payment equal to the notional quantity of gold you have bought. Each resident individual is allowed to buy anywhere between 1 gm and 4 kg gold through sovereign gold bonds per annum.
Sovereign gold bonds come with a lock in period of eight years, however, you can also exit them five years after purchase on the dates of coupon payment. In addition, you can sell them on an exchange. Sovereign gold bonds also carry interest of 2.5% per annum which will be paid semi-annually.
The value of sovereign gold bonds on maturity is not taxable.
If you sell them before maturity on an exchange, you will get the benefit of long-term capital gains taxation (and hence indexation). However the interest you get on them is taxable. TDS is not deducted on payments made through them.
How to buy sovereign gold bonds
You can purchase these bonds from Scheduled Commercial Banks (excluding RRBs), designated Post Offices (as may be notified), Stock Holding Corporation of India Ltd (SHCIL) and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange Ltd. Online subscription to these bonds is also available. Moreover the issue price of the gold bonds will be Rs 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode. Their price will be the weighted average of the price of gold in the preceding three days.
You will receive a holding certificate (including by email if you provide your email address). You can also hold them in demat form in your demat account if you have one.
How they differ from other gold assets
There are three ways of investing in gold as an asset – Physical Gold, Gold ETF & Gold Bonds. Let’s see how they fare against each other:
|Parameter||Physical Gold||Gold ETF||Sovereign Gold Bond|
|Returns||Lower than actual return on gold||Lower than actual return on gold||Higher than actual return on gold|
|Safety||Risk of handling physical gold||High||High|
|Purity of Gold||Purity of Gold always remains a question||High as it is in Electronic Form||High as it is in Electronic Form|
|Capital Gain||Long term capital gain applicable after 3 years||Long term capital gain applicable after 3 years||Long term capital gain applicable after 3 years. (No Capital gain tax if held till maturity )|
|Collateral against Loan||Yes||No||Yes|
|Tradability / Exit Route||Conditional||Tradable on Exchange||Tradable on Exchange. Redemption- 5th year onwards|
|Storage Cost||High||Very Low||Very Low|
How gold bonds compare with other asset classes
Let’s take a look at how do these bonds compare with other investment avenues carrying similar conservative risk profile.
Bank Fixed Deposits: Bank FDs are very popular and simple to understand. You keep money locked in with the bank for a specific investment period against which you earn certain interest per annum. Currently the interest rates offered by banks range between ~6.5-7.5%. On the maturity, principal is paid back to the investor and capital gains tax is deducted from accrued interest income.
Liquid Mutual Fund Schemes: Liquid schemes offered by mutual funds offer investors with a safe and liquid option. Money invested can be withdrawn any time as per requirement. These funds typically aim to deliver repo rate plus 25 basis points (one basis point is 1/100th of a percentage) returns. Being debt funds, long term capital gains tax of 20% with indexation is applicable for holding period of three years.
Among these, SGBs seem to be a better option for long term investments. Apart from being an option for conservative investors, SGBs are also suitable for hedging the overall portfolio risk. As, irrespective of gold price movement – no of units purchased would be returned to the investors on maturity which will be tax free as well.
Only one concern here is assessing how much more potential gold as an asset class has. Last 15 year returns of Gold are ~11% which are comparable with long term equity index performance (like Nifty & Sensex). Last 10 year returns of gold are 7.5%; and last 5 year returns of gold are 1.7%.
We could attribute it to reducing gold demand owing to changing demographics. Or it could be impact of other asset classes doing extremely well in past few years reducing gold demand. Either way, short term returns of this asset class don’t look very promising. However, considering other benefits we think allocating a small portion of your investments towards these gold bonds would be a prudent decision.