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Looking to buy gold this festival season? If you intend to add the yellow metal to your investment portfolio, gold in the electronic form is a better option. You can consider three options for electronic gold — Gold Exchange-Traded Funds (ETFs), gold funds by mutual fund houses and Sovereign Gold Bonds (SGBs).
Gold ETFs and gold funds are offered by mutual fund houses and have costs attached to them. You need to shell out 0.6-1.2 per cent as expense ratio to the asset management company.
Of the three, SGB is a better vehicle to invest in gold, given that there are no costs attached to the investment and investors can earn a nominal interest.
What are they?
SGBs were first launched by the Centre in 2015, and offered through the Reserve Bank of India, with the objective of facilitating electronic investment in gold. SGB is a government security denominated in grams of gold.
These are sold by banks, designated post office branches, NSE, BSE and the Stock Holding Corporation of India (SHCIL). Of course, like with other investments, you need to complete the know-your-customer (KYC) process to be able to invest in SGBs.
SGBs can be held in the dematerialised form, too.
You can pay for SGBs through cash (up to ₹20,000), cheques, demand drafts or electronic fund transfers.
Returns
The returns of SGBs closely track that of domestic gold price. You can redeem the bonds in rupees. The redemption is based on the simple average of the closing price of 999-purity gold on the three consecutive business days prior to the date of repayment, as published by the India Bullion and Jewellers Association.
In addition to that, the Centre also pays an annual interest of 2.5 per cent on the initial investment amount.
The interest will be credited to the investor’s bank account semiannually.
SGBs are denominated in units of one gram of gold and multiples thereof. The minimum investment is one gram. Individuals can hold up to 4 kg any fiscal year, while the limit for trusts and other similar entities is 20 kg. One can also own SGBs jointly, in which case, the limit will apply to the first holder.
In order to encourage online transactions, the RBI offers a ₹50 discount per gram for those who opt to invest as well as make the payment online.
While the risk of gold price fluctuation remains, given the market linkage, the interest income is in addition to the price change, and can help contain the downside when the gold prices go down.
These bonds can also be used as a collateral to borrow from banks or other financial institutions such as NBFCs.
Redemption
SGBs carry a tenor of eight years. However, in case you want funds to meet an emergency, you can redeem them prematurely after completing five years from the date of issue. You can redeem the bonds only on the coupon (interest) payment dates and have to inform the post office or bank branch at least a day prior to the coupon payment date.
In case you hold them in the demat form, they can be traded on the stock exchange, too. However, it is pertinent to note that the trading volume exchanges may be limited.
Tax treatment
The interest paid on SGBs are taxable at the slab rate applicable to the individual. Capital gains arising out of redeeming an SGB is not taxable.
In case of transfer of a bond to another individual, the transferee can claim indexation benefit for the purpose of calculating capital gains tax.
A new tranche of SGBs will open for subscription during October 15-19.
The writer is co-founder, RaNa Investment Advisors
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