Sovereign gold bonds a cheaper way to buy precious metal that also pays 2.5% interest

Sale of the latest tranche of gold bonds underway at Rs 3,788 per gram; subscription period ends Friday

Kumar Shankar Roy Oct 10, 2019

Sovereign gold bondsHere’s another chance to buy gold at cheaper than market rates and also get fixed 2.5% annual interest. Sovereign Gold Bonds (SGBs) are now available for subscription and the current series of gold bonds are priced at 1 gm of gold for ₹ 3,788. That’s cheaper than ₹ 3,814 market rate for the 999 purity gold sold in Indian cities.

To sweeten the deal, the Reserve Bank of India is offering a discount of ₹ 50 per gm on the original value to investors paying through the digital mode. So, effective price would be ₹3,738 per gram.

The subscription of SGB Series-V will end on Friday and the settlement date for the same is October 15.

What are Sovereign Gold Bonds

Sovereign gold bonds are government securities denominated in grams of gold. These gold bonds are issued by RBI. They are backed by the Government of India.

The nominal value of gold bonds are in Indian Rupees fixed on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited, for the last three business days of the week preceding the subscription period. So, gold bonds allows subscribers to own 24 Karat gold.

The latest tranche of sovereign gold bond (SGBs) scheme 2019-20 opened for subscription on October 7.

Also read: Investing in Sovereign Gold Bonds? Here is what you need to know

Why buy gold bonds

Buying gold bonds makes more sense than buying physical gold, or investing in gold exchange traded fund (ETF). The reason is simple: gold bonds pay you interest apart from the capital appreciation potential. Plus, there is no hassle of keeping gold or paying fees to anybody.

SGBs are great for investors wanting to do asset diversification.

SGB Benefits

How is interest paid

Sovereign gold bonds deliver two streams of returns. The first stream is regular interest of (2.5% per annum) on invested capital. This is paid every six months.

The gold bond interest income is clubbed with the subscriber’s income and taxed accordingly. Do note the interest income is not subject to TDS, or tax deducted on source (but this doesn’t mean you are not liable to tax).

The other benefits of SGBs

There are many benefits. In case during redemption the price of gold is higher, then you stand to get capital gain.

Secondly, there is no capital gains tax payable in gold bonds if held till maturity. The maturity period is eight years. So, any capital gains arising at the time of redemption is tax-free. This benefit is not available in gold ETF, gold funds or physical gold.

If you sell SGBs before maturity on an exchange, you will get the benefit of long-term capital gains taxation (and hence indexation benefits too).

Thirdly, sovereign gold bonds can be used as collateral for loans. So, you can pledge to get a gold loan.

Fourthly, minimum investment in the bonds is one gram, which is quite low and affordable for most investors.

Fifthly, no GST to be paid for gold bonds. Usually, GST at 3% is levied on gold purchases.

Sixthly, gold bonds don’t come with any burden like making charges.

Ways to exit from SGBs

If an investor wants to exit from gold bonds before eight years, they can sell on exchanges.

The government also allows an early redemption after fifth year from the date of issue. In both these cases, capital gains tax is applicable.

Important details of Sovereign Gold Bonds

Offer Period – October 7 to October 11, 2019. These bonds will be issued on October 15, 2019.

Issue Price – ₹3738 per gram of gold on online purchase and ₹3788 per gram of gold on offline purchase.

Maturity – Eight years with exit option from 5th year to be exercised on interest payment dates. These bonds will be eligible for trading from the date as notified by the RBI.

Subscription Limits for Individuals – Minimum 1 gram of gold, maximum 4 kg of gold per person in a fiscal year (April – March). Available in units of 1 gram of gold & multiples thereof.

RupeeIQ take

Gold brings to your portfolio low correlation of returns with traditional asset classes such as equity and debt.

Limit gold exposure to 15% of total investment portfolio. That includes gold bonds.

Invest in SGBs for diversification benefits and the stability it can bring to your portfolio returns. Try to buy the gold bonds online.

Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or investment.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at [email protected].

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