Sovereign Gold Bond (SGB) price has been set at Rs 5,923 per gram for the September 2023 series, which opens for subscription today and closes on September 15, 2023.
The SGB scheme is a government-backed investment instrument designed to enable investors to acquire gold without the need for physical possession. These bonds are denominated in grams of gold and are issued in multiples of one gram. The minimum investment allowed in SGBs is one gram, with a maximum limit of 500 grams per individual per fiscal year (April to March).
The nominal value of the bond based on the simple average of closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three working days of the week preceding the subscription period, i.e., September 06, September 07, and September 08, 2023, works out to Rs 5,923 per gram of gold.
Discount: There is a discount of Rs 50 per gram below the face value to investors who apply online and complete the payment through digital channels. For these investors, the SGBs will be available at an issue price of Rs 5,873 per gram of gold.
The SGBs come with an eight-year tenure and provide an annual interest rate of 2.5 per cent. This interest is paid twice a year, in June and December. The interest on Gold Bonds shall be taxable as per the provision of the Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long-term capital gains arising to any person on transfer of bond.
Upon maturity, the bonds are redeemed at the prevailing market price of gold. The bond has exit option in 5th, 6th and 7th year, to be exercised on the interest payment dates.
Should you invest?
Since SGBs are issued by RBI on behalf of the Government of India, it is a secure investment. Whether you hold gold in physical form or in ETF form, there is no regular assured income that you receive. You only gain if the market price of gold moves up. The SGB, on the other hand, pays an annual interest of 2.50% to investors. This is down from 2.75% interest paid earlier, but that is still a good way to put your idle gold investments to use.
Sovereign Gold Bonds are relatively more tax efficient compared to physical gold. Let us understand the capital gains tax aspect of SGBs.
Gold is treated as a non-financial asset and hence the definition of capital gains is a holding period of 3 years in the case of gold.
“If you sell your gold within a period of 3 years then you are liable to pay short-term capital gains tax at the peak rate that is applicable to you. If you sell gold after a period of 3 years, then it is classified as long-term capital gains. It will either be taxed at a rate of 10% without the benefit of indexation or at 20% with the benefit of indexation. In case of SGBs, the redemption of gold bonds will be entirely tax-free in the hands of the investor. (Gold bonds have tenure of 8 years and can be redeemed after a period of 5 years). However, if the SBGs are sold in the secondary market then they will attract capital gains at the extant rates. Interest on SGBs is taxable like normal interest receipts at your applicable tax rate,” explained Motilal Oswal in a note.
Here are 3 key points to consider before investing in SGBs, according to the brokerage
SGBs offer a more efficient, lucrative and economical mode of holding gold compared to physical gold. Not only are SGBs a productive asset earning interest, but they also have the additional benefit of a sovereign guarantee.
Gold tends to outperform other asset classes when there is economic flux, geopolitical uncertainty or a debasement in the value of fiat currencies. Gold is regarded as a safe-haven investment in such uncertain times and hence elicits a lot of demand.
Normally an exposure of 8-12% gold in the portfolio may be ideal to give the safety net to your portfolio in uncertain times. However, one needs to remember that, unlike the equity market, gold does not create long-term wealth.
“We anticipate immense potential benefits from the upcoming Sovereign Gold Bond Tranche in FY24, offering a secure avenue for investors seeking exposure to gold. The first series was issued on June 19 at Rs 5,926 per gram. Gold is expected to outperform most asset classes due to the anticipated slowdown in China, and other major economies including the US. This will drive high alpha-seeking investors to alternative investments and safer avenues like gold. According to various analyst estimates Gold is expected to rise by more than 10% GAGR up to the year 2026. Considering these factors, we expect the 2023-24 Series II gold bonds to deliver substantially above-average returns of more than 20% in the long term,” said Colin Shah, MD, Kama Jewelry.
“Gold is one of the safest asset classes and is a hedge against inflation. Hence, it is good to diversify 5-10% investments in gold. SGB is one of the most convenient and tax-efficient ways to invest in digital gold. It is also apt for those willing to accumulate gold for making jewellery a few years later instead of buying and storing physical gold,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
“Until a couple of years back, purchases via the secondary market would provide a 3-5% arbitrage. This arbitrage has gradually diminished. However, before subscribing to the new issue, it is good to check in the secondary market if any tranches are available at a discount. Secondary market purchases are also suitable for those with a time horizon of less than five years,” added Kulkarni.
“Gold prices have corrected and therefore one can look at SGBs to invest. The SGBs are a good investment instead of buying gold jewellery for investment as they gives interest income, it’s a sovereign credit and has a tax advantage if held to maturity, while jewellery investment involves making charges and locker storage,” said Dr. Poonam Tandon Chief Investment officer at IndiaFirst life Insurance