Personal Finance

Should you invest in the latest tranche of Sovereign Gold Bonds?

Akhil Nallamuthu |BL Research Bureau | Updated on: Jun 21, 2022

The issue price is ₹5,091 per gram, and online applicants would get a discount of ₹50 per gram

The current fiscal's first tranche of Sovereign Gold Bonds (SGBs) issued by the Reserve Bank of India (RBI) on the behalf of the government opened on June 20.

Investors can apply till June 24 and the bond issuance date is on June 28. The price has been fixed at ₹5,091 per gram and online applicants will get a discount of ₹50 per gram.

Is this the right time to participate in SGB 2022-23 Series I? Here are the factors to know before making a decision.

Gold performance

In the current economic scenario, the gold has outperformed other asset classess such as equities. Though gold is flat for almost a year until June 17 in US dollar terms, it has appreciated nearly 6 per cent in rupee terms. Comparatively, the Nifty 50 is down by nearly 12 per cent in the corresponding period.

As gold thrives on uncertainties, the precious metal could see more gains by the end of this year. Among the factors that can aid gold demand are elevated inflation and recessionary fears triggered by the rate hike cycle set off by central banks across the globe.

The yellow metal has very low correlation with other asset classes. Irrespective of the economic conditions, investors can hold about 10 per cent of their portfolios in gold.

Gold is a scarce resource with value that doesn’t depend on the creditworthiness of its holder, and has maintained its worth over the long-term. It helps investors manage their risks than any other financial assets, thereby playing a key role in creating a balanced and stable portfolio.

Why SGBs

While there are many alternative avenues available for an investor to take exposure to gold, SGBs have their own advantages. The number one is its safety and SGBs are issued by the RBI. Two, there is no storage costs or making charges. Three, SGBs provide interest of 2.5 per cent per annum (paid semi-annually) augmenting the return on your investment. No other gold-related investment offers this form of fixed income. Four, the capital gains are exempted from tax if held till maturity, which is eight years. Also, SGBs can be used as collateral for loans.

Do note that gold bonds come with a lock-in period of five years. If sold in the secondary market after five years, low liquidity should be accounted for, in case of your offloading big quantities. Prior series bonds may also be available at a discount in the secondary market. Here too, liquidity will be a factor, in case you deal in big quantities.

Long-term investors can subscribe to the issue as this can give you stability and diversification.

SGB facts to know

Sovereign gold bonds are denominated in grams of gold and one can buy as low as one gram. The maximum limit per year for individuals and Hindu Undivided Families (HUFs) is four kgs and for trusts and similar other entities it is 20 kgs.

SGBs can be bought through banks, designated post offices, Stock Holding Corporation of India Ltd. (SHCIL) and authorised stock exchanges. You can apply online and claim a discount of ₹50 per gram. Note that if you are paying in cash there is a limit of ₹20,000 for purchases.

On specific request while applying, you can get the bonds in demat form.

In case you want to exit after five years, you should inform the respective financial institution through which you bought 30 days prior to the coupon payment date.

While capital gains on maturity are exempt from tax, the interest is taxable (as per your slab). And this will not be deducted at source i.e., TDS not applicable. Even if you sell in the secondary market prior to maturity, you will have an indexation benefit if you have held the bonds for more than 36 months.

On maturity, the payment will be made based on the simple average of closing price gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association Limited.

The SGB scheme was launched in November 2015 with an objective to reduce the demand for physical gold and shift a part of the domestic savings — used for the purchase of gold — into financial savings.

Published on June 21, 2022
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