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Do You Know the “RRTL” of Sovereign Gold Bonds (SGB)?

, June 19, 2019, 0 Comments

Government of India has announced the Sovereign Gold Bond Scheme (SGB) 2019-20- Series I/II/III/IV vide its Notification dated May 30, 2019. The First Tranche is open from 3/6/2019. An understanding  of the Return, Risk, Tax & Liquidity (RRTL) features of SGBs can help the prospective investors to take an informed decision.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds (SGBs) are government securities issued by Reserve Bank of India (RBI) on behalf of the Government of India. Instead of investing in physical gold as an investment, investors can prefer to invest in SGBs. The investors will receive certificates of SGBs. They can be held in physical form or Electronic form. These certificates are denominated in grams of gold. Minimum investment in the Bonds shall be one gram with a maximum limit of subscription per fiscal year of 4 kg for individuals. The nominal value of the Bonds shall be fixed in Indian Rupees fixed on the basis of simple average of the closing price of gold of 999 purity published by the India Bullion and Jewelers Association Limited for the last 3 working days of the week preceding the subscription period.

For example, If 1gm gold price is Rs.3,245 as per the simple average of closing price of gold then, an investor has to invest minimum of Rs.3,245. He will be issued a bond which is denominated in 1 gm. At the time of maturity, the investor will be given the market price of 1 gm gold prevailing at that time.

How to apply?

The Bonds are sold through banks, Stock Holding Corporation of India Limited, designated post offices and recognized stock exchanges (NSE) and Bombay Stock Exchange Limited (BSE). Every application must be accompanied by the ‘PAN details’ issued by the Income Tax Department to the investor(s).


What is the Return (the benefits) on SGBs?

The Bonds shall bear interest from the date of issue at the rate of 2.50 percent (fixed rate) per annum on the nominal value. Interest shall be paid in half-yearly rests and the last interest shall be payable along with the principal on maturity.  Government of India should pay at least the rate of interest similar to that of a normal savings bank account, as 2.5% is very low. The difference between the nominal value and the redemption value at the time of redemption (withdraw) or maturity is called Capital gain. The capital gain is the major return from SGBs. With the exception of few lows, the gold price trend has been on rise historically.

What is the Risk (probability of not getting interest /principal or both) in investing SGBs?

Being Government of India is the issuer, it is risk free investment. It is subject to Liquidity risk, meaning it can’t be easily converted into cash within the investment period of eight years.

What are the Tax implications (how much income tax to be paid)?

Interest on the Bonds shall be taxable. There is no tax on capital gains arising on the redemption (withdraw) of SGBs.

Do SGBs have liquidity (the ability to convert into cash)?

The Bonds shall be repayable on the expiration of eight years from the date of issue of the Bonds by Government. So the investors should be ready to keep the money for a period of eight years.   If the investor wants to withdraw the investment back before eight years, he/she is permitted after the fifth year of the date of issue of the Bonds. Such repayments shall be made on the next half yearly interest payment date. The redemption price shall be fixed in Indian Rupees and the redemption price shall be based on simple averages of the closing price of gold of 999 purity of the previous 3 working days, published by the India Bullion and Jewelers Association Limited. Investors can go for loans against SGBs as the Bonds may be used as collateral for loans. These Bonds will be traded in Bombay Stock Exchange and National stock Exchange from such date as may be notified by the Reserve Bank of India. Investors can exit the investment by selling the Bonds in the Stock Exchanges. It can be transferred to eligible investors.

Investors can go for this paper gold, if it suits their RRTL preferences!!!