In India, gold has always been a popular investment option due to its religious and cultural significance. While investors seek to diversify their investments across various asset classes, since 2019, gold prices have seen an upward trend. In 2019, the price of one gram of 24k gold was around Rs.3200. Today, the price is around Rs.5000. This is an increase of around 56% in just two years.

This is a testament to the increase in demand for gold and gold-related securities. There are many ways to invest in gold like buying physical gold (jewelry, coins, bars, etc.), gold mutual funds, gold ETFs, digital gold, or Sovereign Gold Bonds (SGBs). Today, we are going to talk about SGBs and discuss things that you need to know about buying them from stock exchanges.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. There are government securities denominated in grams of gold. SGBs are easier to handle and the acquiring and maintenance costs are lower too. They have a maturity period of 8 years and offer interest at the rate of 2.5% per annum paid bi-annually.

Invest in Sovereign Gold Bonds

  • 2.5% interest per annum
  • No capital gains tax on maturity

How to buy SGBs?

Sovereign Gold Bonds are issued by the RBI in different tranches in a financial year. These bonds are made available through a distribution channel including certain commercial banks, post offices, online platforms and stock exchanges. RBI also offers a discount of Rs.50 per gram to investors who purchase the SGBs online.

Since the bonds are not issued all through the year, investors who miss applying for them in the public issue can buy them from the secondary market.

Things to Consider before Buying SGBs from the Exchanges

You can buy SGBs from the secondary market using your demat and trading accounts. It is important to remember that the RBI issues SGBs in tranches throughout the year. Hence, if you have missed an issue, you can always wait for the next one. However, buying from the stock exchange on the secondary market offers certain benefits.

Buying SGBs from the secondary market offers certain benefits and requires a certain amount of diligence as explained below.

1. Available at a Discounted Price

Sovereign Gold Bonds track the price of one gram of gold. However, it is important to remember that the trading volume of SGBs is very low. Therefore, they are usually traded at a discount to the market price. For example, the spot price of 24k gold in Mumbai on Dec 19 was around Rs.5184 whereas SGBVs were being traded at Rs.4844 on the BSE. This is usually the case – SGBs trade at a discount to the prevalent market rate. 

However, to benefit from the discounted rate, remember the following two points:

  • This can work to your benefit provided you are willing to hold the bond until maturity. If you try to sell the bond on the stock exchange, then you might have to sell at a discounted price too since the trading volumes are low. However, if you hold the bond until maturity, then you will receive the market price of gold as on the date of redemption.
  • Always remember that the trading volume is very low – around 100-150 bonds per day. In fact, bonds from many series are not traded at all. Hence, when you buy on the secondary market, consider avoiding buying in bulk. This is important since large orders might result in the price shooting up immediately. Hence, consider buying small quantities and accumulate the bonds over time.

2. Assess Liquidity Before Buying

The stock market functions purely on the demand and supply of a security. So, before you purchase the SGB on the secondary market, assess the liquidity of the series that you plan to buy. If the demand for the said series is high, then you may not be able to get a good discount on it. On the other hand, if you intend to buy the bond and sell it again on the stock exchange, then look for a series with higher liquidity. 

3. Understand the Tax Benefits and Implications of SGBs Before Investing

The Government of India launched SGBs to make it easier and cost-efficient for people to invest in gold. It has also offered a unique tax benefit. According to the Sovereign Gold Bond (SGB) Scheme, the bond has a maturity of eight years. On maturity, the redemption amount is not subject to capital gains tax. 

It is important to note that this is applicable to bonds purchased from the secondary market too. When you buy an SGB from a stock exchange, you are not purchasing the bond but getting it transferred from a previous buyer. Hence, the transaction is not treated as a redemption of the bond but merely a transfer. After the transfer, you become the bondholder and will receive tax-free redemption proceeds on maturity. 

However, if you sell the bond on the stock exchange before maturity, then the capital gains earned by you will attract a capital gains tax. If the period of holding is less than three years, then the capital gains are treated as short-term capital gains or STCG. These gains are added to your taxable income and taxed as per the applicable tax slab. If the holding period is more than three years, then the capital gains are treated as long-term capital gains or LTCG. These gains are taxed at 20% with indexation benefits.

You also receive interest in these bonds at the rate of 2.5% per annum. This is paid bi-annually. There is no TDS or tax deducted at source on this interest amount. It is added to your taxable income and taxed as per the applicable tax slab too.

Summing Up

SGBs are designed to make gold investment simple. They offer tax benefits if held until maturity. SGBs are not designed for trading. Hence, most people buying these bonds hold on to them. This is evident by the low trading volume of SBGs on stock exchanges. So, before you buy them – either during the issue period or from the stock exchange, ensure that you understand the pros and cons of investing in them carefully.

If you have decided to invest in SGBs, then buying them from the stock exchange can help you get a discounted price. 

Remember, Sovereign Gold Bonds are an excellent option to include gold as an asset class in your portfolio. However, ensure that you learn everything about them before investing. We hope that this article answered all questions pertaining to buying SGBs from the exchanges. 

Happy Investing!