TL;DR: If you want to invest in gold, the Sovereign Gold Bond is superior to physical gold. Interest on bond value, the option to trade it on exchanges and tax-free capital gains add to its shine (pun intended).
What are sovereign gold bonds?
Sovereign Gold Bonds are government securities that the RBI issues. You can purchase these bonds, which are denominated in grams of gold, and you’ll get a certificate for it. Simply put – you’re buying gold from the government in paper form.
How Do Sovereign Gold Bonds Work?
You can apply to buy bonds for as low as 1 gram or up to 4 kgs through scheduled commercial banks where you have a bank account or through the stock exchange. Just google Sovereign Gold Bonds along with your bank’s name, and you should be able to find the application forms. The tenure of each bond is eight years. This means the bond will ‘mature’ at the end of 8 years.
The bond’s maturity value will be the number of grams of gold you purchased multiplied by the gold value on the maturity date. Gold prices right now are around Rs. 6,000/- for a gram. Let’s say you buy 10 grams at Rs. 60,000/- and in 8 years it’s Rs. 9,500 for a gram. You will receive Rs. 95,000/- on maturity. Apart from this, you will also receive 2.5% interest per annum on the nominal value of your bond (i.e., the Rs. 60,000/- that you paid to purchase it) over the eight years.
Why buy bonds over physical gold?
There are several advantages to investing in gold bonds over physical gold. Some of the benefits include:
- Government Issued: The bonds are issued by the RBI, which means that they’re a safe investment that’s been guaranteed by the government.
- No storage costs: You can buy anywhere between 1 gram to 100 grams of gold [max 4 kg!] via Sovereign Gold Bonds and not have to think about lockers costs because gold bonds are stored in demat accounts. As a bonus, no stress of theft, either!
- No extra costs: Unlike jewellery, where you’d have making charges, wastage and GST on top of it, there are no extra costs with gold bonds.
- Exempt from capital gains: Upon maturity, your investment (in grams) will be worth its weight at prevailing gold prices. Gold prices right now are around Rs. 6,000/- for a gram. Let’s say in 8 years time it’s Rs. 9,500 for a gram. Your investment’s value will increase in the same proportion, and this increase/capital gain is also tax free!
- Interest income: You will earn an interest of 2.5% every year on the “nominal value” of the bond. Nominal value is the value at which you purchased each gram of gold. Physical gold doesn’t earn you money. It only costs you money to store.
- Loans: It’s very easy to avail loans using your gold bonds as collateral.
Do I have to hold it for eight years?
The tenure of a gold bond is eight years, with an option to exit from the fifth year. However, if you’re holding them in Demat form, you can actually trade or sell them on stock exchanges. However, gold bonds are valuable investments only when held for the full term.
Why buy sovereign gold bonds now?
The nominal value of the gold bonds issued in the SGB 2023-24 Series II tranche (which opens on the 11th of September!) works out to Rs 5,923 per gram of gold. Gold prices have dipped recently, so now is a great time to invest in gold.
Gold is especially useful to have in your portfolio during times of uncertainty because its value is independent of the movements that go on in the stock market. Besides, gold is a limited resource. So, if you’ve been thinking about investing in gold, don’t think twice. Go for it!
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