Personal Finance

Should you invest in the new Sovereign Gold Bond series?

Maulik Madhu BL Research Bureau | Updated on December 29, 2020

The issue price of ₹5,000 per one gram is lower than that in the preceding four series; investors may allot 10-15 per cent of their portfolio to gold

The Sovereign Gold Bond (SGB) Scheme 2020-21-- Series IX-- opened for subscription on December 28 and will be available until January 1, 2021. The issue price is ₹5,000 (one gram of gold) and those applying online and paying digitally will get a discount of ₹50 per gram.

Is it a good time to invest in SGBs now?

Gold bonds – basics

SGBs are issued in denominations of one gram of gold and in multiples thereof. As an individual, you can buy a minimum of 1 gram and up to a maximum of 4 kilograms during a financial year. The limit includes bonds bought in the primary issues as well as those from the secondary market. SGBs can be bought from banks, designated post offices, Stock Holding Corporation of India, National Stock Exchange of India and BSE .

While the investment tenure of these bonds is eight years, early redemption with the RBI is allowed from the fifth year onwards. For this, you must approach the concerned bank, post office or the exchange 30 days before the coupon payment date. You can also sell in the secondary market any time (subject to trading volumes).

Pros and cons

Buying and selling SGBs in the secondary market may not be easy because of insufficient volumes. Select gold ETFs may be a better option from the liquidity point of view. Otherwise, SGBs score well on a few other fronts. One, while gold ETFs suffer expense ratio, there is no purchase cost involved in SGBs. Two, the capital gain on SGBs in certain cases is exempt from tax. Three, investors receive an interest of 2.5 per cent per annum (paid semi-annually) on their initial investment in the SGBs. Four, these bonds are backed by sovereign guarantee.

Returns and tax implications

Investor returns from SGBs comprise the 2.5 per cent interest payout, plus the capital gain (if any), i.e,. appreciation in the price of gold from the time of purchase to the time of redemption. If you hold the bonds until maturity (eight years), then the capital gains, if any, are exempt from tax. However, taxation of premature redemption with the RBI from the fifth year remains a grey area.

Capital gains on SGBs sold in the secondary market are taxed at an individual’s income tax slab rate, if held for 36 months or less, and at 20 per cent with indexation benefit if held for more than 36 months. According to a few brokerages with whom we spoke, irrespective of where the bonds are bought from (primary or secondary market), if the bonds are sold in the secondary market, capital gains tax is applicable.

That apart, the interest received on these bonds is taxed at your relevant slab rate.

Should you invest?

The rally in gold prices in the past two years (despite the recent decline) makes investments in gold now unattractive. However, there are a few points to note.

Gold is considered a safe-haven asset and does well in times of uncertainty. Starting with the concern over the global economic slowdown and the uncertainty over the US-China trade war and Brexit, later exacerbated by the impact of the pandemic on the global economy, gold has been on an uptrend. While many developments on the vaccine front have raised hopes, the uncertainty is far from over. Also, with many central banks globally (most significantly the US Fed) having infused substantial liquidity, the risk of inflation remains. This can be a positive for gold which is considered a hedge against inflation.

More importantly, investors can benefit from holding gold (possibly 10-15 per cent) in their portfolio from the point of view of asset class diversification. With that in mind, this could still be a good time to buy gold and hold it for the long term. You can stagger your intended investment in gold over the next few months instead of making the entire investment in one-go, to gain from any immediate-term weakness in gold prices.

The issue price of ₹5,000 in the ongoing offer is lower than that in the preceding four issues – in August (beginning and end), October and November 2020. The issue price of ₹5,334 for the SGB Scheme Series V, which opened on August 3, 2020 was the highest ever. This price is a simple average of the price of gold (999 purity) for the last three business days preceding the subscription period.

For 2020-21, the remaining three SGB issues – series X, XI and XII, will open on January 11, February 1 and March 1.

Published on December 29, 2020

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