Should you subscribe to the latest Sovereign Gold Bond issue?

Akhil Nallamuthu | Updated on: Mar 01, 2022

Gold has been in focus in recent weeks because of geo-political developments around Russia and Ukraine, besides inflation across the globe

Series X of the Sovereign Gold Bond (SGB) scheme 2021-22 opened for subscription on February 28, 2022, and will remain so until March 4, 2022.The issue price is fixed at ₹5,109 per gram and online applicants will receive a discount of ₹50 per gram.

Safe haven

There has been a spike in interest in gold in recent weeks because of the geo-political developments around Russia and Ukraine. Not to mention rising inflation across the globe. Gold, known as a safe haven, is also seen as a good tool to hedge against inflation. Therefore, everything seems to be falling in line for the yellow metal for the near-term. However, SGB is a long-term instrument. The latest issue is priced nearly 7 per cent higher than the previous few isssues. Is it worth betting on it today ?

Why SGB

One should remember that gold as an asset class is uncorrelated to other assets, and it always throws a protective net during economic or political distress. Therefore, long-term investors should consider adding gold to their portfolio. Gold has produced a CAGR of nearly 11 per cent over the past five years, and about 6 per cent over the last ten years.

Yes, there are alternative ways through which you can take exposure on gold like Exchange Traded Funds (ETFs), digital gold and physical coins and bars. But there are certain advantages that come along with SGB. First and foremost, SGBs are issued by the RBI. Two, there are no storage costs, making charges, etc., Three, you will receive an interest payment of 2.5 per cent per annum, which can add to the overall return of investment. Four, these can be used as collateral for loans and five, capital gains are exempt from tax if you hold them until maturity, which is eight years. Early redemption is allowed after five years.

Therefore, if you are a long-term investor, you can go ahead and subscribe. Prior series are available at a discount in the secondary market; however, liquidity is low, and it can be very difficult to buy unless you aim for a small quantity.

SGB facts

SGBs are denominated in grams of gold and one can buy as low as one gram. But a person should be a resident Indian at the time of subscription. The maximum limit per year for individuals and Hindu Undivided Families (HUFs) is 4 kg and for trusts and similar entities it is 20 kg.

SGBs are sold through banks, designated post offices, the Stock Holding Corporation of India Ltd. (SHCIL) and authorised stock exchanges, either directly or through their agents. It can also be applied online to claim a discount of ₹50 per gram. Note that if you are paying in cash, there is a limit of ₹20,000.

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

The annual interest of 2.5 per cent will be paid semi-annually. The payment will be made to the bank account that you mention in the application form. You can get the certificate from the institution through which you apply. If you provide your e-mail, you will receive the digital copy in mail.

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

While capital gains on maturity are exempt from tax, the interest will be taxed as per your slab. TDS is not applicable. Even if you sell in the secondary market prior to maturity, you will have indexation benefit, if you have held the bonds for more than 36 months.

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

Published on March 01, 2022
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