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What Are Sovereign Gold Bonds (SGB)?

Sovereign Gold Bonds (SGB) are government securities issued by the Reserve Bank of India (RBI) on behalf of the Indian government. These bonds are denominated in grams of gold and offer a way for investors to invest in gold without having to physically own the metal.

SGBs are an excellent alternative to physical gold because they provide both capital appreciation (based on gold prices) and an additional interest component.

Key Features of Sovereign Gold Bonds

Denomination: SGBs are issued in denominations of grams of gold. For example, 1 gram, 2 grams, 5 grams, etc., depending on the issuance scheme.
Interest: SGBs offer an annual interest of 2.5% (fixed) on the initial investment amount, payable every six months. This makes SGBs a good source of periodic income in addition to the capital appreciation from gold price movement.
Tenure: The maturity period of these bonds is 8 years, with the option to exit after the 5th year. The interest is paid semi-annually, and the bond matures at the prevailing market price of gold at the time of maturity.
Capital Appreciation: The value of SGBs is linked to the price of gold. Therefore, when gold prices rise, the value of the bond also rises, providing potential capital gains.
Taxation:
- Interest Income: The interest earned on SGBs is taxable as per your applicable tax slab.
- Capital Gains Tax: If you redeem the bond after 8 years, the capital gains tax on the appreciation of the bond’s value is exempt. If sold before maturity, capital gains tax applies depending on the holding period (short-term or long-term).
- Indexation Benefits: If the bonds are held for more than 3 years, you can avail of indexation benefits to reduce the tax burden on the capital gains.
Minimum & Maximum Investment: The minimum investment in SGBs is 1 gram of gold, and the maximum limit is 4 kg for individuals, 4 kg for Hindu Undivided Families (HUF), and 20 kg for trusts and similar entities.
Liquidity: Although SGBs are meant to be held for 8 years, they can be sold on the secondary market (stock exchanges), making them relatively liquid compared to physical gold.

Benefits of Sovereign Gold Bonds

Gold Exposure without Physical Gold: You can invest in gold without the need to worry about storage, security, or purity, unlike physical gold (coins, bars, etc.).
Attractive Interest Rate: In addition to capital appreciation (linked to gold prices), SGBs offer a fixed annual interest rate of 2.5%, which is not available with physical gold investments.
Safety: Since these bonds are issued by the Indian Government, they are considered very safe. There's no risk of loss due to theft, deterioration, or storage issues, which is common with physical gold.
Tax Benefits: Capital gains tax on the appreciation of SGBs is exempt if held until maturity (8 years), which is a significant tax benefit compared to other gold investment options.
Easy to Buy and Hold: SGBs can be bought through Fundzbazar, making them easily accessible. You don’t need to deal with the hassle of buying, storing, or securing physical gold.
Liquidity in Secondary Market: If you want to sell your bonds before maturity, you can trade them on the stock exchanges (NSE, BSE), making them a relatively liquid investment.
Helps with Diversification: SGBs are an excellent way to diversify your portfolio by adding gold exposure without holding physical assets. This can be useful during periods of economic uncertainty when gold often acts as a safe-haven asset.

How Sovereign Gold Bonds Are Safe

Government Backed: SGBs are issued by the Government of India, meaning they come with the sovereign guarantee. This makes them one of the safest investments available, as the government guarantees both the principal and the return.
No Risk of Theft or Loss: Unlike physical gold, SGBs are digital and held in your demat account, eliminating the risks of theft, damage, or loss associated with physical gold.
Market-linked Returns: The value of the bond is directly tied to the price of gold, which is influenced by global market factors. Gold is traditionally considered a safe-haven asset that tends to perform well during economic volatility or inflationary periods.
Regulated by RBI: The bonds are regulated by the Reserve Bank of India (RBI), ensuring that they adhere to government norms and regulations, adding an extra layer of security for investors.

Example

Let’s say you invest in 10 grams of Sovereign Gold Bonds at a price of ₹5,000 per gram. Your total investment would be ₹50,000. Over the next 5 years, if the price of gold increases, your bond’s value will rise accordingly.

At the end of the 8th year, if the price of gold has increased to ₹6,000 per gram, your 10 grams of SGBs will be worth ₹60,000 (₹6,000 x 10 grams), providing capital appreciation of ₹10,000.
In addition, you would have earned ₹2,500 annually (₹50,000 x 2.5%) in interest, which would be paid every six months.

Conclusion