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Sovereign gold bonds: The what, why, and how of investing in SGBs

India loves gold. In the list of the highest gold-consuming nations, it ranks second, right behind China. And when it comes to demand for gold jewellery, India tops the list. A wedding in the country is incomplete without gold. In fact, weddings generate about 50% of the demand for gold jewellery in India. Do you know who else loves gold other than India? Investors. 

Gold is a safe-haven investment with an inverse correlation with the stock market. Hence, the role of gold in an investment portfolio is crucial. Historically, whenever the stock market has crashed, the prices of gold have gone up – be it during the 2008 recession or in 2020 when the pandemic broke out. While there are several ways to invest in gold to add diversification to your portfolio and hedge market risk, some ways are more efficient than others. And Sovereign Gold Bonds (SGBs) are one of the more efficient ways to invest in gold. 

In this SGB guide, you will learn everything you need to, from sovereign gold bond returns to risks, in order to make an informed investment decision. 

Table of contents

1. What are sovereign gold bonds?

2. How do sovereign gold bonds work?

3. Sovereign gold bond features

4. Benefits of investing in sovereign gold bonds

5. Risks involved in buying sovereign gold bonds

6. Gold bond advantages over physical gold

7. Difference between sovereign gold bonds vs gold ETFs

8. How to buy sovereign gold bonds?

9. Should you invest in gold bonds?

10. SGB: It glitters and is gold too

11. Sovereign gold bonds FAQs

1. What are sovereign gold bonds? 

Sovereign gold bonds are government-issued securities that act as a substitute for investing in physical gold like jewellery and coins. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Indian government. They rid you of the hassle of storing physical gold and worrying about its safety while also allowing you to earn the interest as income. SGBs come with an interest rate of 2.5%, which is paid to investors on a half-yearly basis. Hence, when you invest in SGBs, you can not only benefit from capital gains (profit from the difference between the selling price and the buying price) but also earn a fixed income.

2. How do sovereign gold bonds work? 

SGBs are sold on a per-unit basis, and each unit derives its value from its underlying asset, which is one gram of gold with 999 purity. The minimum investment required is one gram, and the maximum investment allowed is 4 kilograms in the case of individual investors and Hindu Undivided Families (HUFs) and 20 kilograms in the case of companies and trusts. 

RBI issues SGBs throughout the financial year in different tranches or intervals. You can buy them through the primary market, i.e, directly through the RBI when they issue a new series of SGBs. Alternatively, you can buy SGBs through the stock exchanges in the secondary market after the RBI has issued the new series. SGBs come with a maturity period of eight years. However, they still offer liquidity as you can sell the bonds in the secondary market before maturity. 

3. Sovereign gold bond features 

Here are some of the important sovereign gold bond features you should know about.

3.1 Pricing

The sovereign gold bond price, both the issue and redemption price, is calculated based on the closing prices of gold published by the India Bullion and Jewellers Association Limited (IBJAL). The average closing price of gold for the last three working days from the issue and redemption date is calculated as the sovereign gold bond price. 

3.2 Interest

Sovereign gold bond returns are fixed in nature as these bonds come with a coupon or interest rate of 2.5% per annum on the initial investment amount. The interest payment is periodic and is credited to investors on a half-yearly basis. The last interest payment on SGBs is credited along with the principal on maturity. 

3.3 Tenure

Being fixed-income securities, SGBs come with a fixed tenure. When you buy SGBs from the primary market, they come with a fixed tenure (sometimes called tenor in the case of SGBs) of eight years. However, you do have the option of trading these bonds in the secondary market on exchanges, or withdrawing prematurely.

3.4 Premature withdrawal

Despite the fixed tenure of eight years, SGBs do offer the option of premature or early withdrawal. You can opt for this once five years are completed from the date of issue. Such a payout will be processed on the interest payment date of the year you exercise this option. 

3.5 Resale

In case you don’t want to continue holding the gold bonds until maturity, you can decide to sell them in the secondary market. Such resale is only possible from a specific date, as notified by RBI. For SGBs to be tradeable on stock exchanges, they must be held in your dematerialised or demat account. 

3.6 Taxation

SGBs are exempt from capital gains tax. This means that the gains you make from the difference between the redemption price and the issue price of sovereign gold bonds are not taxable. However, this tax benefit is offered only if you hold SGBs until maturity. If you do sell them before the maturity period of eight years, then you are liable to pay capital gains tax.

If you sell the gold bonds before the completion of three years, your gains will attract short-term capital gains tax and will be taxed as per your income tax slab rate. In case you sell them after a holding period of three years, then your gains will attract long-term capital gains tax at 20% with indexation benefits (or 10% without indexation benefits). As for the interest earned on SGBs, it is taxable according to your income tax slab rate. 

4. Benefits of investing in sovereign gold bonds 

Sovereign gold bonds offer a host of benefits that make them one of the best ways to add gold exposure to your investment portfolio. Here are a few:

  • Low-risk

SGBs make for a low-risk investment as they come with the sovereign guarantee of the Government of India. This means there is almost no credit risk when you invest in gold bonds since the chances of the government defaulting on interest payments and capital repayment are extremely low. 

  • Convenience

SGBs were introduced as a part of the government’s gold monetisation scheme in 2015. The purpose was to reduce India’s dependence on gold imports by mobilising the gold held by households and institutions in the country. So, the government has made it as convenient and easy as possible to invest and hold SGBs. 

When you buy an SGB, you receive a certificate as proof of holding. This can be either in an electronic form or physical form, depending on whether you buy sovereign gold bonds online or offline. Either way, you can choose to transfer your holding certificate to your demat account. So, with SGBs, the buying and storing process of gold investments is hassle-free. 

  • Capital appreciation 

Since SGB’s underlying asset is gold, a precious metal whose price tends to increase in the long term, you can benefit from significant capital appreciation when investing in gold bonds. For instance, between 2000 and 2010, gold prices rose from INR 4,400 to INR 18,500 per 10 grams. And this trend has only continued – gold prices shot up from INR 18,500 to INR 52,000 per 10 grams between 2010 and 2020. That’s around a 162% return in the past decade. In addition to capital appreciation, you also get to earn interest income from SGBs, making for a good source of passive income over its tenure.

  • Hedge against inflation

Investments that have returns higher than the inflation rate are beneficial as they help protect the value of your money while also allowing it to grow. Traditionally, gold has acted as a solid hedge against inflation, given its significant capital appreciation. Though this correlation is becoming weaker in recent years, it’s still seen as a great inflation-beating investment option apart from stocks. 

Additionally, when an economy faces high levels of inflation, investors tend to flock toward gold investments while exiting the stock market. Hence, in times of economic distress, gold tends to hold up much better than other investment products. So, having SGBs in your portfolio is great for earning inflation-beating returns and hedging stock market volatility. 

  • Long-term investment 

Goal-based investing is a great strategy for meeting financial goals over different time periods. Since SGBs come with an eight-year tenure, you can invest in them to meet your long-term goals. When looking at long-term investments, you need to consider the level of capital appreciation and capital protection. The great thing about SGBs is that it ranks high on both. 

  • Usage as collateral  

In case of a financial emergency, you can use your gold bond investments to access funds without having to sell them in the secondary market. SGBs are eligible as collateral or security for loans from banks and Non-Banking Financial Companies (NBFCs). Depending on the bank or the NBFC, some may accept SGB as collateral only in demat form, while some may also accept the physical certificate. The Loan to Value (LTV) ratio for SGBs is in line with RBI’s guidelines for standard gold loans. This is typically 75%. This means you can get a loan amount equal to 75% of the value of your SGBs without having to sell them. 

While making any investment, it’s essential that you also carefully consider the risks that the investment type carries. So, let’s examine the risks involved when buying SGBs. 

5. Risks involved in buying sovereign gold bonds 

One of the primary risks involved with investing in SGBs is capital loss. This, however, is not specific to the nature of SGBs but is a general risk of any investment. So, if the price of gold is lower at the time of redemption of the bond than its price at the time of issue, you will have to bear a capital loss. While gold as an asset typically sees price appreciation over the long term, the risk of price drops cannot be ignored. However, you will never lose in terms of the quantity of gold that was allotted to you when you invest in SGB. This is assured by the RBI and the government. 

6. Gold bond advantages over physical gold 

You may be wondering why you should consider opting for gold bonds instead of investing in physical gold, which has traditionally been quite popular in India. Firstly, options other than physical gold for investing, such as gold bonds, weren’t present until fairly recently. They are comparatively new but are quickly gaining traction due to the edge they offer over physical gold investments. And here are all the ways gold bonds make for a superior investment as compared to physical gold:

  • Cost 

One of the primary differences between SGB and physical gold is that physical gold requires you to bear the cost of storage to keep it safe. With gold bonds, you don’t need to bother about the safety and storage of your investment as it’s a certificate that you can simply hold in an electronic or demat form. 

  • Price loss

When you opt for physical gold investments like jewellery, you have to bear charges called making costs, which reduce the resale value and lead to a price loss. No such charges have to be incurred at the time of investing in SGBs. Moreover, when buying physical gold, there is the issue of verifying the gold purity. However, with SGBs, you have the central bank’s assurance of the gold being of the highest purity – 999 or 24 carat. 

  • Capital gains tax

When you sell physical gold, you need to bear capital gains tax at 20% with indexation benefits in case of long-term capital gains and tax according to your income tax slab rate in case of short-term capital gains. However, capital gains on gold bonds are 100% exempt from taxation. The only thing you need to ensure for this tax benefit is holding the gold bond until maturity. 

  • Interest income

No matter the type of physical gold you invest in, it does not give you any benefit in terms of income generation during its holding period. However, with gold bonds, the interest gets credited to you twice a year for the entire tenure at 2.5% per annum. Such passive income can be used to meet your short-term goals. 

  • Accessibility

Another major difference between SGB and physical gold is that gold bonds make it accessible for anyone to invest in gold, as the minimum purchase quantity is one gram. The last SGB series was issued at INR 5,179 per gram. So, even if you have a low investible corpus, SGBs allow you to diversify your portfolio by adding gold. However, when it comes to physical gold like jewellery, you need a lot more capital to invest. 

Gold bonds, hence, have an edge over physical gold and make for a better investment instrument. 

7. Difference between sovereign gold bonds vs gold ETFs

Along with gold bonds, gold Exchange-Traded Funds (ETFs) are a popular way of investing in digital gold. Here’s how the two are different.

FeatureSovereign gold bondsGold ETFs
IssuerRBI issues gold bonds on behalf of the government. Different Asset Management Companies (AMCs) issue gold ETFs. 
Liquidity SGBs come with an eight-year tenure and a five-year lock-in period unless an investor sells them in the secondary market. Hence, they are not ideal for short-term investors who are looking for higher liquidity.Gold ETFs can be traded on the stock exchange like shares at any time and do not come with any tenure or lock-in period. Hence, gold ETFs offer high liquidity. 
Demat account A demat account is not necessary for investing in SGBs.To invest in gold ETFs you need to have a demat account. 
Assured incomeGold bonds come with a coupon rate of 2.5% per annum. This means you get assured returns in the form of interest income.Gold ETFs don’t carry an assured interest component with them and don’t guarantee returns of any kind. 
Fees and costThere are no costs or charges associated with SGB at the time of buying or selling. The expense ratio, transaction costs, and demat account charges are associated with gold ETFs.
Taxation Gold bonds are exempt from capital gains tax if held until maturity. Gold ETFs attract capital gains tax, the rate of which depends on the duration the investment is held for.

Consider your financial goals and their timeframes to decide whether you should invest in gold bonds or gold ETFs. If your goals are short term and liquidity is essential, then gold ETFs would make for a better investment. And you can easily add US-based gold ETFs to your portfolio by downloading the Appreciate App. On the other hand, if your investment horizon is long term and you would like to earn a fixed income during the investment tenure, then gold bonds are better suited. 

8. How to buy sovereign gold bonds?

You can buy sovereign gold bonds online or offline when RBI issues a new series of SGBs. You can buy them online directly through RBI’s website or the websites of listed scheduled commercial banks. When you apply to invest in gold bonds online, you will get a discount of INR 50 per gram on the nominal value. Alternatively, you can also buy gold bonds offline. You can do this through the physical branches of the listed scheduled commercial banks, designated post offices, and the Stock Holding Corporation of India (SHCIL). 

You can also purchase SGBs from the secondary market through recognised stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). For this, however, you need to have a demat account. 

9. Should you invest in gold bonds?

A robust and diversified portfolio will always have gold in it. Most experts recommend 5% to 15% of gold exposure. The exact allocation percentage would depend on the size of your portfolio, its current asset allocation, and your risk appetite. For gold exposure, you should consider digital gold over physical gold, given the edge it has as an investment instrument. 

Now, when it comes to digital gold, gold bonds are the top candidate if your investment horizon is long. That’s because while you can sell the gold bonds in the secondary market before its eight-year tenure is over, you only really reap its true benefits if you hold it till maturity. These benefits include tax exemption on long-term capital gains and regular interest income. While you can earn significant capital gains by selling the bonds in the secondary market if the prices of gold surge, nobody can perfectly time the market and hence such gains are not guaranteed. Therefore, if liquidity is not a priority and you are looking to diversify your fixed-income portfolio as well as add gold exposure, then gold bonds can be a great fit. 

10. SGB: It glitters and is gold too

Sovereign gold bonds bring you all the advantages of investing in gold that has made investors from across the world invest in this precious metal for centuries while doing away with the cons of investing in physical gold. 

SGBs are easy to buy, hold, and trade. You don’t need a demat account, you don’t need a lot of capital, and you don’t need to worry about it being a risky investment. So, as an investor looking to diversify with moderate risk, sovereign gold bonds should be your pick. 

If you are also looking to diversify your equity portfolio, then you should consider adding global investments. Such geographical diversification helps hedge stock market volatility as stock markets around the world are not perfectly synced. And with Appreciate, you can now easily access a range of high-performing US-based stocks and ETFs. 

11. Sovereign gold bonds FAQs

  1.  Who Should Consider Buying Sovereign Gold Bonds?

An investor with a long-term investment horizon looking to diversify by adding gold to their portfolio should consider buying sovereign gold bonds. Anyone looking to invest in digital gold should also consider buying these bonds. 

  1. What is the minimum permissible investment in sovereign gold bonds?

One gram of gold is the minimum permissible investment in sovereign gold bonds. As for the maximum permissible investment, it is 4 kilograms for individuals and HUFs and 20 kilograms for corporations and trusts in one financial year. 

  1. What is the maturity value of sovereign gold bonds?

The maturity value of sovereign gold bonds is calculated based on the prevailing gold price. It is based on the simple average of the closing price of gold for the three working days preceding the maturity date.

  1. Can sovereign gold bonds be converted to physical gold?

No, you cannot convert sovereign gold bonds to physical gold. However, SGBs are backed by physical gold. The purpose of issuing SGBs is to allow investors to hold gold in digital form.

  1. Do sovereign gold bonds come under section 80C?

No, investments in sovereign gold bonds are not tax-deductible under section 80C of the Income Tax Act, 1961. However, capital gains on these bonds are fully tax-exempt if held until maturity. 

  1. Can I sell a sovereign gold bond before maturity?

Yes, you can sell a sovereign bond five years after the issue date by opting for early or premature redemption. You can also sell the bonds in the secondary market after a specified date as notified by the RBI.

  1. Can a sovereign gold bond be purchased without a demat account?

Yes, you can buy a sovereign gold bond without a demat account. After purchasing the bond, either in the form of a physical or electronic certificate, you can also transfer it to your demat account.

Team Appreciate

Team Appreciate