Reserve Bank Of India said that the First tranche of Sovereign Gold Bonds (SGB) of 2022-2023 would be open for Subscription from 20 June.
It does happen in the majority of households that if you ask that should we sell physical Gold, then an overall understanding is that something is their billy wrong with that family, that family is in a terrible financial need, and that is the reason they have to sell off their Gold; that’s how the Gold is looked at in a traditional Indian Family. Investment in Gold is not a bad idea at all. It is a perfect way to diversify your portfolio but then how to detach ourselves from Gold is a big question and for that, the Gold in the E-format rather than buying it in the physical format.
The Sovereign Gold Bonds (SGB) were introduced in November 2015 to reduce the demand for physical Gold. Anyone who wants to invest in Gold usually goes to the market to purchase Gold. But the Sovereign Gold bond scheme is launched, so this physical mode gets eliminated. Moreover, shift a part of the domestic savings – used for purchasing Gold – into financial savings.
So first, let’s start with the meaning of Sovereign. Sovereign mean “Ruler.” Here the Ruler is the Government of India. The Gold Bonds are issued as Government of India Stock under the government Securities (GS) Act, 2006. These are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. You might be thinking that it is safe. Then the answer is Obviously Yes because the Government of India is issuing these Bonds, so there is no chance of default as such.
Bonds are sold through Commercial Banks, Stock Holding Corporation of India Limited (SHCIL), post offices, and recognized stock exchanges, viz., National Stock Exchange of India Limited, and Bombay Stock Exchange, either directly or through agents.
When the government issues these Bonds, and if an individual wants to invest in Gold, that individual can give that invested amount to the government. The government will provide bonds as a piece of evidence. Afterward, when the rate changes, these fluctuations can be seen in those bonds. Here the benefit is that the government will provide interest on these invested amounts.
If we talk about the Eligibility, the Bonds are resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
Investment Limit: Gold bonds can be purchased in multiples of one unit, up to certain thresholds for different investors.
The upper limit of retail (individual) investors and HUFs is kilograms (4,000 units) each per financial year. An upper limit of 20 kilograms per financial year is applicable for trusts and similar entities.
The minimum permissible investment is 1 gram of Gold.
Terms: The gold bonds come with a maturity period of eight years, with an option to exit the investment after the first five years.
Interest Rate: A fixed rate of 2.5 percent per annum is applicable on the scheme, payable semi-annually.
The interest on Gold Bonds shall be taxable per the Income Tax Act, 1961.
Should we Invest in Gold because it’s a Gold Bond we are investing in?
You might have this question in your mind. So what if there is no appreciation in the coming years? For this, we need to check the track record of what has happened in the past few years.
So if you would Check out the records, you can see that in 2015 the Price was 26343, then a drastic increment can be seen in 2020 of about 42300. Here the CAGR comes out is of about 37 percent. This is what the return gold had given. If you would check the last ten years, then out of them for seven years, Gold had given a positive rate of returns.
Not only from the growth perspective and return perspective but also the perspective of diversification of portfolio, Gold is one of the best fields of investment.
How Much returns in Comming Years?
Past return was on an average above the CAGR of 37 percent, but what about returns in the coming years..how much are we expecting in the Coming Years?
Let’s talk about a fixed component of return that you will get on whatever would be the gold price in the future.
You will get an assured return of two and a half percent (2.59 %) per annum. This is an annual to annual but will be paid on a semi-annual basis on your account. In simple words, on Six monthly bases, you will get this interest of Gold Bond at the rate of 2.50 percent.
For instance, if the face value is Rs100, then 2.5 percent will be your interest, which will be split as 1.25, to be paid in two slots; one for the six months and another 1.25 for the next six months.
Are we talking about gold appreciation at this point? Absolutely No. This is a gold bond. A bond is like a debt instrument, a fixed return barring instrument. So as of now, here we are not talking about capital appreciation. We are talking only about the limited return you will get. And how much is that; 2.5 percent. Who will pay it semi-annually and very important? And this is Simple interest, not Compound interest that you will get from this investment.
In the Above Example, we have assumed the face value to be 100. Let’s understand what the actual face value of the bonds is?
It is 4,677 rupees per gram. But it is imperative that if you buy Sovereign Gold Bonds through an online platform, you will get a 50 rupees discount per gram. So now, the revised purchase price per gram will reach 4,627 rupees per gram.
Again, you will get the interest at 2.5 percent, but the question is 2.5 percent of what? For 4627 or 4677? You will get 2.5 percent of 4677 rupees because that is the nominal value. If you calculate this, it would be roughly around 116 rupees annually—this is for when you buy one gram of Gold. As you might be thinking, Is the amount taxable? Then Yes, the amount is taxable.
Let’s suppose I have bought one unit for one quantity of Sovereign Gold Bonds, which is equivalent to one gram, and after eight years, I sell, which is the maturity period; however, you have the exit option after five years. Then whatever gain I will get, assume that I have bought that for 4627 and sell it off at 6627, then there is a capital gain of 2000 rupees. Here you don’t need to pay tax. This capital gain is exempt if you hold this bond until maturity.
