Sovereign Gold Bonds; Returns, Benefits, Risks
Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for physical gold. Investors have to pay the issue price in cash, and the bonds are redeemed in cash on maturity. The bonds are issued by the Reserve Bank of India (RBI) on behalf of the central government. Banks, exchanges, and designated agents, among others, issue the SGBs, to which interested buyers can subscribe to via an application form. SGBs offer an interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment, according to the RBI website.
Here are 5 things you should know about investments in Sovereign Gold Bonds (SGBs)
1. Benefits of SGBs over physical gold: The quantity of gold for which an investor pays is protected, since he receives the current market price at the time of redemption/ premature redemption. SGBs offer a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGBs are free from issues such as making charges and purity that prevail in the case of physical gold in jewellery form. The bonds are held in the books of the RBI or in demat form, eliminating the risk of loss of scrip etc.
2. Risks involved while investing in SGBs: There may be a risk of the part of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold, which he has paid for.
3. Investment limits in SGBs: The bonds are issued in denominations of one gram of gold and in the multiples thereof. The minimum investment in SGBs is one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April - March).
4. Returns on SGBs: For simplification purposes the following example tries to elucidate on the tax treatment under various investment avenues, for calculation purposes several reasonable assumptions have been made which are as follows:
• Investment Amount- Rs 100,000
• Investment Horizon- 1 Yr, 3 Yr and 5 Yr
• Annual appreciation in Gold Prices -10%
• Average annual inflation of 5% for the period 5 Yrs
• Individual Tax Slab- 10 %
| Horizon | Line Items | Physical Gold | Sovereign Gold Bond | Gold ETF |
| 1 Yr | Value of Gold | 1,10,000 | 1,10,000 | 1,10,000 |
| Indexation Benefit Factor | - | - | - | |
| Cost of Acquisition | 1,00,000 | 1,00,000 | 1,00,000 | |
| Profit | 10,000 | 10,000 | 10,000 | |
| TAX@10% (Excluding Cess) | 1,000 | 1,000 | 1,000 | |
| Interest Income | - | 2,500 | - | |
| Tax on Interest@10% (Excluding Cess) | - | 250 | - | |
| Total Income | 10,000 | 12,500 | 10,000 | |
| Total Tax | 1,000 | 1,250 | 1,000 | |
| NET PROFIT | 9,000 | 11,250 | 9,000 | |
| 3 Yr | Value of Gold | 1,33,100 | 1,33,100 | 1,33,100 |
| Indexation Benefit Factor | 1.16 | 1.16 | 1.16 | |
| Cost of Acquisition | 1,15,763 | 1,15,763 | 1,15,763 | |
| Profit | 17,338 | 17,338 | 17,338 | |
| LTCG@20% (Excluding Cess) | 3,468 | 3,468 | 3,468 | |
| Interest Income | - | 7,500 | - | |
| Tax@10% (Excluding Cess) | - | 750 | - | |
| Total Income | 17,338 | 24,838 | 17,338 | |
| Total Tax | 3,468 | 4,218 | 3,468 | |
| NET PROFIT | 13,870 | 20,620 | 13,870 | |
| 5 Yr | Value of Gold | 1,94,872 | 1,94,872 | 1,94,872 |
| Indexation Benefit Factor | 1.28 | 1.28 | 1.28 | |
| Cost of Acquisition | 1,27,628 | 1,27,628 | 1,27,628 | |
| Profit | 67,244 | 67,244 | 67,244 | |
| LTCG@20% (Excluding Cess) | 13,449 | - | 13,449 | |
| Interest Income | - | 12,500 | - | |
| Tax@10% (Excluding Cess) | - | 1,250 | - | |
| Total Income | 67,244 | 79,744 | 67,244 | |
| Total Tax | 13,449 | 1,250 | 13,449 | |
| NET PROFIT | 53,795 | 78,494 | 53,795 |