Sovereign Gold Bonds open for subscription: All you need to know

Gold has always been regarded as a symbol of wealth and security, and for centuries, it has been a popular investment choice. Traditionally, gold was purchased physically—jewellery, bars, or coins. However, with modern financial instruments, investing in gold has become more streamlined and secure. One such innovation is the Sovereign Gold Bond (SGB) scheme, which offers a contemporary alternative to owning physical gold. This blog will explore the Sovereign Gold Bonds, detailing their features, benefits, and the process for subscribing to them.

Sovereign Gold Bonds, issued by the Reserve Bank of India (RBI) on behalf of the government, are securities denominated in grams of gold. They provide a paper-based substitute for owning physical gold. Sold in units of one gram, the minimum investment corresponds to the cost of one gram of gold.

Investors pay the issue price in cash at the time of purchase, and the bonds are redeemed in cash upon maturity. SGBs can be traded on the stock exchange, and the interest earned is subject to tax under the Income-tax Act 1961. However, there is no Tax Deducted at Source (TDS) on earnings, and capital gains tax is exempt upon maturity for individual investors. Additionally, these bonds can be used as collateral for loans.

The SGB Scheme, introduced by the government in November 2015, provides an alternative to physical gold ownership by offering gold in a 'certificate' format. Here are some key features of the scheme:

• Denomination: Bonds are issued in multiples of grams of gold, with a minimal unit of 1 gram. Thus, the minimum investment is 1 gram of gold.
• Tenor: The bonds have an 8-year term, with choices to exit in the 5th, 6th, and 7th years. This exit can be exercised on the interest payment dates.
• Interest: The bonds offer a fixed annual interest rate of 2.50% on the nominal value, credited semi-annually to the investor's account. The final interest payment is made at maturity, along with the principal.
• Returns: The value of SGBs is linked to gold prices. As gold prices rise, the value of the bonds increases accordingly.
• Guarantee: SGBs are backed by a sovereign guarantee for the redemption amount and interest, ensuring a secure investment.

The Reserve Bank of India (RBI) usually issues four tranches of SGBs each financial year (April-March), with the latest series, 2023-24 Series IV, being available from 12 February 2024 to 16 February 2024. The issue price for this series was ₹6,263 per gram.

SGBs offer numerous benefits as an investment, making them a compelling alternative to physical gold:

• Government Guarantee: Issued by the Government of India, SGBs come with a sovereign guarantee, ensuring a high level of safety and reliability.
• Online Accessibility and Lower Costs: Investing in SGBs is straightforward and can be done online through various platforms, including NetBanking or Demat accounts. This convenience often results in lower transaction costs compared to purchasing physical gold.
• Collateral for Loans: SGBs can be used as collateral for loans, providing an additional layer of financial flexibility for investors.
• Price Linkage: The value of SGBs is directly linked to the price of 999 purity (24k) gold, as published by the India Bullion and Jewellers Association (IBJA). This means that when gold prices rise, the value of your SGBs increases accordingly. Additionally, SGBs can be easily sold in the secondary market, offering liquidity.
• Fixed Interest Rate: Investors earn a fixed annual interest rate of 2.5% on their SGB holdings, comparable to the returns from saving bank deposits. This interest is paid separately from the capital appreciation of the bonds.
• Negligible Holding Costs: Unlike physical gold, which incurs costs for safekeeping and security, SGBs are paper-based, thus minimising holding costs and eliminating the need for physical storage.
• Tax Benefits: If you retain your Sovereign Gold Bonds until maturity (8 years), any capital gains are tax-free, as outlined in Section 47(viic) of the Income Tax Act, 1961.

HDFC Bank customers can invest in government-issued sovereign gold bonds through NetBanking or a Demat account, with a ₹50 discount per gram. Simply log in to NetBanking, click on the ‘Offers’ tab, or visit your nearest HDFC Bank branch to start your investment.