Twelve questions you always wanted to ask about Sovereign Gold Bonds

With the latest issue of Sovereign Gold Bonds (SGB) open on 17 May, it is time to look at 12 very interesting and important questions investors may have about gold bonds. Perhaps, this can answer some of the questions you had about SGBs, but were not sure whom to ask.

May 17, 2021 01:05 IST India Infoline News Service

With the latest issue of Sovereign Gold Bonds (SGB) open on 17 May, it is time to look at 12 very interesting and important questions investors may have about gold bonds. Perhaps, this can answer some of the questions you had about SGBs, but were not sure whom to ask.

1. Will there be more gold bond issues in the year after the current SGB issue?
There are likely to be a total of 6 sovereign gold bond issues in the first half of FY22 before September 30, 2021. The first issue of the year, SGB212201, opens on 17 May and close on 21 May. There are likely to be 2 more issues opening in May and then 3 more between July and August. In all there will be 6 issues of gold bonds in the first half of FY22 with the current issue from 17 May to 21 May being the first one.

2. Should I invest in this SGB issue or should I wait for lower prices?
It is tough to predict which way the price of gold can go. However, you must look at gold more as a protection to your portfolio. Typically, not more than 10-15% of your overall portfolio allocation must be to gold and that includes gold in all physical and non-physical form, except jewellery. Keep that as the benchmark and avoid timing gold prices.

3. How is the price of the gold bond issue decided
The price of the gold bond issue is decided by the government based on the average market price of gold that is prevailing, which is the landed cost plus local taxes. The first issue of SGBs in FY22 has been priced at Rs4,777 per gram. However, if  you make a digital application, you get a discount of Rs50 per gram and only have to pay Rs4,727 per gram.

4. What is the minimum and maximum investment I can make in the latest SGB issue?
The minimum gold bond you can buy in the current issue is 1 gram and then in multiples of 1 gram. There is no upper limit, but there is an annual limit of 4,000 grams or 4 Kg of gold that a person can invest in. If you are a family of 4 members, then each member has an outer limit of 4 Kg per year. For trusts, the limit is higher at 20 Kg per year.

5. Where can I buy these gold bonds?
You can buy these gold bonds from scheduled commercial banks, post offices, SHCIL or even from the stock exchanges through your trading account on NSE or BSE. Small Finance Banks and Payment Banks are not permitted to sell Sovereign Gold Bonds.

6. Can I buy SGBs online through my trading account in IIFL Securities?
Yes, you can buy sovereign gold bonds online through your internet enabled trading account with IIFL Securities or even through the app if mobile trading application is activated. Being a digital application, this application will entitle you to discount of Rs50 per gram.

7. What is a better choice; SGBs or gold ETFs?
Both have different purposes. SGBs are available in tranches but gold ETFs can be purchased on tap based on real time prices. However, in gold ETFs  you only get the price movement. In SGBs you get the price movement and the interest of 2.5% per year. The choice is yours.

8. What is the return that I can expect on these gold bonds in next 5 years?
There are two types of returns you get. First, there is the fixed interest of 2.50% per year that will be paid to you. Then there is the capital gains component, but that will be subject to gold prices going up. Gold prices can move either ways.

9. How will the interest and capital gains be taxed?
Interest of 2.5% is fully taxable and you have to pay tax on the peak rate of tax applicable to you. As a special case, SGBs are exempted from long-term capital gains tax if held till the maturity period of 8 years. Otherwise, long-term capital gains tax is payable if held for more than 3 years and short term capital gains tax if held for less than 3 years.

10. If I need liquidity in between, can I sell or redeem these SGBs?
The SGB has a maturity of 8 years after which it will be redeemed. However, government offers a liquidity window after the fifth and sixth years. Also, the bonds are listed on the stock exchanges after 6 months of the issue date, but there are issues of liquidity and discount you will have to check for. You can also get loans against SBGs.

11. Does the government guarantee returns on the SGB?
The government guarantees the interest of 2.5% and the repayment of principal in equivalent grams of gold. The price movement is entirely based on market factors and the government has no control over that.

12. How can I pay for the bond and will there be TDS on interest?
SGB applications up to Rs20,000 can be paid for in cash but anything above that must be paid through banking channels like cheque, DD, NEFT, RTGS etc. There is no TDS deducted on interest but the onus is on the investor to disclose the income in the annual tax returns.

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