SGBs or Sovereign Gold Bonds are government securities that are denominated in grams of gold and issued by the Reserve Bank of India (RBI). They are a cost-efficient and hassle-free alternative to investing in physical gold.

They are issued in one gram multiples. Individual and HUF investors can invest a minimum amount equivalent to one gram gold and a maximum investment worth 4kg. Trusts and other entities specified by the government can invest up to 20kg worth of gold.

SGBs are issued with a maturity period of 8 years. Investors are allowed early redemption/encashment after 5 years. Alternatively, they can sell the bonds on the secondary market if they are listed from the date specified by the RBI.

Invest in Sovereign Gold Bonds

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

The government offers an assured rate of interest of 2.5% per annum on the issue price, paid bi-annually. Sounds interesting? Here is a list of exhaustive FAQs on SGBs that will help you learn more about it. Read On!

What are the Benefits of Buying SGBs Over Physical Gold?

Here is a quick comparison between investing in physical gold and Sovereign Gold Bonds:

  • Buying Limits – There are no limits on buying physical gold. You can purchase as much as you want based on your budget. On the other hand, when you buy an SGB, the minimum purchase amount is equivalent to one gram of gold and the maximum is 4kg (20kg for trusts).
  • Lock-in – There is no lock-in restriction on the purchase of physical gold. With SGBs, you cannot redeem/encash the bonds before the completion of five years from the date of purchase.
  • Risks – Buying physical gold has safety and purity risks associated with it. On the other hand, SGBs can have some liquidity concerns.
  • Tax implication – For physical gold, STCG tax is levied at the applicable income tax slab rate and LTCG tax at 20% with indexation benefit. For SGBs, STCG tax is levied at the applicable income tax slab rate and LTCG tax at 20% with indexation benefit (in case of premature redemption). If the investor holds the bonds until maturity, then there is no LTCG tax.

Is investing in SGBs Safe? What are the Risks?

Since the bonds are backed by the government, there is no risk of default in the repayment of the bonds. However, the value of the bonds is based on the market price of gold. Hence, if the gold price declines, then investors stand the risk of losing the invested capital.

Who Can Invest in the Sovereign Gold Bond Scheme?

According to the Scheme, Indian residents as defined under the Foreign Exchange Management Act (FEMA), 1999, can invest in SGBs. The investors that are eligible are individuals, UHFs, trusts, universities, and charitable institutions.

If you have invested in SGBs as a resident Indian and subsequently changed your status to a non-resident, you can still continue to hold the bonds until redemption or maturity. Joint holding is permitted. Minors can also apply for SGBs provided the guardian makes the application on the behalf of the minor.

How to Invest in SGB?

The RBI makes SGBs available for purchase in different tranches in a financial year. Investors can buy them via different channels like select commercial banks, post offices, and stock exchanges. SGBs can be bought online as well as offline. Investors are required to fill an application form and complete the KYC.

What are the Limits on Investment?

Sovereign Gold Bonds are issued in multiples of one gram of gold. The minimum investment is one gram for all kinds of investors. The maximum investment norms are as follows:

  • For individuals and HUFs – the maximum subscription limit is 4kg of gold per financial year
  • For trusts and other entities specified by the government – the maximum subscription limit is 20kg per financial year

If the holding is joint, then the limit will apply to the first holder alone. Also, the limit applies to bonds subscribed under different tranches and secondary market purchases. 

What is the rate of Interest on SGBs and How is it Paid?

Sovereign Gold Bonds offer interest at the rate of 2.5% per annum. It is calculated on the initial investment amount and NOT on the current price. Interest on SGBs is paid out bi-annually (twice a year). It is directly credited to the bank account of the investor. If the bond is held until maturity, then the last interest is paid out along with the principal.

What are the Benefits of Applying for SGBs Online?

Investors can apply for SGBs online through the websites of listed commercial banks, brokers, or Stock Holding Corporation of India (SHCIL). The scheme offers a small discount to investors applying online and making the payment digitally. The issue price for such purchases is Rs.50 per gram less than the nominal value.

How is the Maturity Price of the Bond Determined?

On maturity, the investor will receive the market value of the amount of gold held via bonds. The redemption price is determined by taking a simple average of the closing price of gold of 999 purity from three business days before the maturity date. The rates taken are as published by the India Bullion and Jewelers Association Limited. 

Is Premature Redemption Allowed?

Yes. Investors can apply for premature redemption of the SGB. The tenor of the bond is 8 years. The premature redemption facility can be availed of after the completion of five years from the purchase date.

Can I Gift an SGB to Someone?

Yes. Investors can gift or transfer an SGB to a friend, relative, or anyone else provided the eligibility criteria are met. These bonds can be transferred by executing an instrument of transfer that is available with the issuing agents.

Can I use SGBs as Collateral for a Loan?

Most banks, non-banking financial companies, and financial institutions treat SGBs as valid collaterals for loans. Usually, people who invest in physical gold also use the asset as collateral for a loan during emergencies. An SGB is no different. The Loan-to-Value (LTV) ratio is the same as in the case of physical gold as prescribed by the RBI. However, a bank or financial institution can choose to not accept SGB as valid collateral. Hence, it is important to check with your bank before investing.

What are the Nomination Norms in SGBs?

Sovereign Gold Bonds offer a nomination facility to investors. The nomination form can be filled in along with the application form. 

What are the Rules Surrounding the Transfer of SGB to a Non-resident Nominee?

If the nominee of a deceased investor is a non-resident Indian, then the security can be transferred provided the nominee holds the security until early redemption or maturity. Also, the interest and maturity proceeds of the bond will not be repatriable

What are the tax implications of the interest received on SGBs?

First, there is no TDS (tax deducted at source) on the interest paid on SGBs. The interest earned every year is added to the annual income of the investor and taxed as per the applicable tax slab

What are the Tax Implications of the Capital Gains Earned on SGBs?

If the investor holds on to the bond until maturity, then the maturity amount received is exempted from tax. However, if the investor opts for premature redemption or sells the bond on the secondary market, then tax is deducted as follows:

  • If the bond is held for less than three years before being sold, then the capital gains earned are deemed short-term capital gains. The amount is added to the annual income of the investor and tax as per the applicable tax slabs.
  • If the bond is redeemed/sold prematurely after the completion of three years from the purchase date, then the capital gains earned are called long-term capital gains. These are taxed at 20% with indexation benefits.

 What is the Process to be Followed Upon the Death of an Investor?

On the death of an investor, the nominee(s) are required to approach the Receiving Office with their claim. If there is no nomination, then the executors or administrators of the deceased holder or the individual with the succession certificate needs to submit the required documents at the Receiving Office.