SOVEREIGN GOLD BOND SCHEME (SGB)
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Meaning of Sovereign Gold Bond
The Sovereign Gold Bond Scheme is a government-run scheme in India that allows individuals to invest in gold in a paperless manner. Under this scheme, the government issues bonds denominated in grams of gold, which can be purchased by Indian residents, HUFs, trusts, universities, and charitable institutions.
Features of Sovereign Gold Bond
- Tenure:The tenure of the bonds is eight years, with an exit option available after the fifth year.
- Investment limit:The minimum investment in the scheme is 1 gram of gold, and the maximum investment is 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar entities in a fiscal year.
- Interest rate:The bonds earn an interest rate of 2.5% per annum, which is paid semi-annually.
- Redemption:The bonds can be redeemed in cash on maturity at the prevailing market price of gold. Alternatively, the investor can choose to sell the bonds on the stock exchanges before maturity.
- Taxation:The interest earned on the bonds is taxable as per the income tax laws in India. However, there is no capital gains tax applicable if the bonds are held till maturity.
The Sovereign Gold Bond Scheme is a good investment option for those who want to invest in gold without the hassle of physical storage and safety concerns. It provides an opportunity for individuals to diversify their investment portfolio and earn a steady return on their investment.
Disadvantages of Sovereign Gold Bond
While the Sovereign Gold Bond Scheme has many advantages, there are also some potential disadvantages that investors should consider before investing in these bonds. Here are some of the disadvantages of investing in Sovereign Gold Bonds:
- Limited liquidity: Sovereign Gold Bonds are traded on stock exchanges, but the liquidity in the market can be limited, especially for smaller investors. This can make it difficult to sell the bonds if the investor needs cash urgently.
- Long-term investment:Sovereign Gold Bonds have a tenure of eight years, with an exit option available after the fifth year. This makes it a long-term investment, and investors who may need the money in the short term may not find this investment suitable.
- Fixed interest rate:While Sovereign Gold Bonds offer an interest rate of 2.5% per annum, this rate is fixed for the entire tenure of the bond. This means that the investor will not benefit from any increase in the price of gold or changes in interest rates.
- Taxation: While the interest earned on Sovereign Gold Bonds is taxable, the capital gains made on the bonds are tax-free only if the investor holds the bond till maturity. If the bond is sold before maturity, then the capital gains tax will be applicable.
- Investment limit:The maximum investment limit for Sovereign Gold Bonds is 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar entities in a fiscal year. This limit may not be suitable for high net worth individuals who want to invest a larger amount in gold.
In summary, while Sovereign Gold Bonds offer many advantages such as ease of investment, safety, and steady returns, there are also some potential drawbacks such as limited liquidity, fixed interest rates, and long-term nature of investment. Investors should weigh these factors carefully before investing in Sovereign Gold Bonds.
Comparison Between Physical Gold, Digital Gold, Gold ETF, Gold Mutual Funds, and SGBs
Here are the key differences between Physical Gold, Digital Gold, Gold ETF, Gold Mutual Funds, and Sovereign Gold Bond:
Physical Gold: Physical gold is the traditional way of investing in gold. It involves purchasing gold in the form of coins, bars, or jewelry, which can be stored at home or in a bank locker. The value of physical gold is determined by the prevailing market price of gold.
Digital Gold: Digital gold is a newer way of investing in gold that involves buying gold in small amounts digitally through online platforms or mobile apps. The gold purchased is stored in a secure vault and can be sold or redeemed for cash at any time. Digital gold is an affordable and convenient way to invest in gold, especially for small investors.
Gold ETF: A Gold ETF or Exchange-Traded Fund is a type of mutual fund that invests in gold and trades on stock exchanges like a stock. It is a paper-based form of gold investment and does not require physical storage of gold. The value of a Gold ETF is determined by the market price of gold and the performance of the fund.
Gold Mutual Funds: Gold Mutual Funds are mutual funds that invest in companies involved in the gold mining or processing industry. These funds are not directly invested in gold and hence their performance is linked to the performance of the gold mining industry.
Sovereign Gold Bond: Sovereign Gold Bond is a government-run scheme that allows investors to invest in gold through bonds. The bonds are denominated in grams of gold and have a tenure of eight years. The interest rate on Sovereign Gold Bond is 2.5% per annum, and the bonds can be redeemed in cash on maturity at the prevailing market price of gold.
Maximum Investment | Minimum Investment | Cost | |
Physical Gold | Rs. 6000 (Approx 1gm) | No Limit | Making Charges- 10% Insurance/Locker- 3% GST-3% |
Digital Gold | Starting at Rs. 1 | No Limit | Spread- 6% GST-3% |
Gold ETF | Rs. 5000 (Approx 1gm) | No Limit | Expense Ratio- 0.5-1% Demat Expense |
Gold Mutual Funds | Starting at ?100 | No Limit | Expense Ratio- 0.5-1% |
SGB | Rs. 5000 (Approx 1gm) | Individual/HUF- 4kg Trusts- 20kg | NO |
In summary, physical gold is the traditional way of investing in gold, digital gold is a newer and more convenient way of investing in small amounts, Gold ETFs are a paper-based form of gold investment that does not require physical storage of gold, Gold Mutual Funds invest in companies involved in the gold mining or processing industry, and Sovereign Gold Bonds are government-run bonds that allow investors to invest in gold. Each of these investment options has its own advantages and disadvantages, and investors should choose the one that best suits their investment goals and risk appetite.
Is the interest on sovereign gold bonds taxable?
Yes, the interest on Sovereign Gold Bonds (SGBs) is taxable in India. The interest earned on SGBs is considered as "Income from Other Sources" and is added to the investor's total income for the purpose of income tax calculation. The interest income is taxed at the investor's applicable income tax slab rate.
However, the capital gains on the redemption of SGBs are exempted from tax if the bonds are held until maturity. If the investor chooses to sell the bonds before maturity, then the capital gains will be taxed as per the applicable tax rates.
It is important to note that tax laws are subject to change, and investors should consult a tax expert or refer to the latest tax guidelines before investing in SGBs.
Article Compiled by:-
Mayank Garg
+91 9582627751
Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretaryetc.
