SBGs are issued by the Reserve Bank of India (RBI) on behalf of the Indian government. Every SBG bond unit is worth one gram of 999-purity gold. The cost is computed by averaging gold’s three-day closing prices before the subscription period. The India Bullion and Jewelers Association (IBJA) publishes these closing prices. The redemption price uses the same basic data.
SGBs have an eight-year duration and a 2.5 percent per year interest rate paid half-yearly. Anyone can buy 4kg per year, and a trust can buy 20kg. a PAN number, issued by the tax department is required to purchase an SGB.
SGBs’ Function
The Reserve Bank of India issues SGBs in tranches throughout the year. Banks, brokers, post offices, and internet platforms provide these securities. Investors who buy SGBs online get a small per-gram discount. The RBI releases new SGBs every year.
Physical, digital, or dematerialized bonds are available to investors. Once acquired, investors can seek to have these bonds credited to their Demat accounts which hold these assets in digital form. RBI processes dematerialization and holds the bonds.
SGB investment benefits
SGB is a solid alternative for gold investors. SGBs preserve gold purity and reduce investor risk. As digital bonds are stored in an investor’s Demat account, they save on the cost of holding actual or physical gold. Buying gold bars does present a certain kind of investment risk and cost.
SGB bonds are tax-free at maturity, making them appealing to long-term investors. SGB does have risks, however. If gold goes below its cost price, there is a loss. This is a danger for all gold investments, not just SGBs. However, The RBI guarantees that investors will never lose their allotted gold.
SGBs have an eight-year contract length or tenor. However, RBI allows early redemption after five years. Coupon payments allow redemption. Investors just need to visit the bank, post office, or agent a month before the coupon payment date. They can part-redeem holdings (the minimum quantity being one gram). Redemption money is credited to the bondholder’s account.
If held in dematerialized form, these bonds can be purchased and sold on stock markets. The liquidity of the specific series will determine a bondholder’s selling price.
Investors should understand the tax implications before investing. India created SGBs to encourage gold investment. SGBs are tax-friendly and have an eight-year maturity. The maturity gain is tax-free, but any sale before maturity is taxed based on the term held.
Tax exemption applies to secondary market bonds as well. When you acquire SGBs via a stock exchange, the transaction is not a redemption, but a transfer. After the transfer, you become the bondholder and get a tax-free sum at maturity. If you sell a bond before it matures a capital gains tax applies. These short-term advantages are taxed according to your tax bracket.
If held for longer than three years, the profit is considered a long-term capital gain. Capital gains are taxed at 20% with indexation or 10% without. These bonds yield 2.5% annually.
SGBs can be utilized as loan collateral. When institutions accept SGBs as security it decreases the cost of loans and encourages people to obtain genuine gold to use in hard times.
SGBs promote gold investment and offer tax benefits at maturity. However, they are not well suited for trading. Most SGB bond buyers have a long-term outlook indicated by the low SBG’s trading volume.
Before buying SGBs during an issue period or through the stock exchange, consider the pros and cons of this kind of investment. SGBs can help you diversify your portfolio by conveniently adding gold, something many wise investors do.
