Sovereign Gold Bonds (SGBs) of India

SGBs or Sovereign Gold Bonds, are one of the most popular RBI Bonds among investors.

But many confuse the underlying asset of Sovereign Gold Bonds. The underlying asset of SGBs is gold and not RBI debt.

What are Sovereign Gold Bonds?

Sovereign Gold Bond is a financial product offered by the Reserve Bank of India (RBI) which allows citizens to invest in gold without owning physical gold. It is a government-guaranteed scheme that aims to financialize the country's huge stock of privately held gold and reduce India’s gold imports.

Investors generally refer to SGBs as ‘gold bonds’ too.

The first tranche of SGBs was launched in Nov 2015 by the Reserve Bank of India. Since then, more than Rs. 38,000 crores have been invested in all SGB issues combined. That’s a testament to the popularity of SGBs.

While the instrument is simple to understand – it tracks the price of gold – it has many features that can make or break your decision to invest in them. Let’s look at them!

Features of RBI Sovereign Gold bonds

Very low risk

RBI issues SGBs with the promise of buying them back after the end of the lock-in period and up to the maturity date. Backing of the central bank makes these Bonds very low risk.

Low cost

Buying SGBs to invest in gold is better than buying physical gold since you are not paying any GST, making charges and storage costs.

SGBs are cheaper than gold ETFs and gold mutual funds because they don’t have transaction costs and management fees.

Further, SGBs are issued at a discount of Rs. 50/gram to the existing market price of gold. However, this discount is applicable only for online applications where payment is made digitally.

Easily Accessible

SGBs are issued in grams of gold. The minimum amount an investor needs to buy is 1 gram.  As of January 2023, the price of gold is hovering around Rs. 5,600 per gram which is feasible for most investors.

Limit on maximum investment

Retail and HUF investors can buy a maximum of 4 kgs worth of SGBs every financial year. The limit for trusts and institutions is 20 kgs.

Maturity

All SGBs mature at the end of 8 years from the issuance date. Maturity is when the bonds are extinguished.

Sovereign Gold Bond Interest rate

SGBs offer an annual interest rate of 2.5% paid twice a year to the bondholder. This is over and above the price appreciation of gold, the underlying asset.

This means, if you hold the bond for a year where gold has appreciated by 10%, the extra 2.5% interest will take your annual return to 12.5%!

Liquidity

SGBs are liquid because, once issued, they start trading on the stock exchange. In case an investor wants his money back before maturity, this is the only way to liquidate SGBs.

It has been observed that the liquidity of SGBs on the stock exchange is not very good. So, investors may not get fair price for the SGBs they are trying to sell due to lack of buyers.

Lock-in

SGBs bonds have a lock-in period of 5 years from issuance date. This means if you are the original buyer of the bond, you cannot sell it back to the RBI before 5 years are completed.

However, since these bonds have a secondary market (i.e., they can be bought and sold on the exchange), you may buy these bonds long after they have been issued. This doesn’t change the lock-in period of the original bond but the lock-in period applicable to you will be different.

For example – If you buy an SGB bond that’s issued 2 years ago, the lock-in for you will be just 3 years.

Collateral for bank loans

When you take a loan (example – home loan), you need to put up a collateral that the banking institution has a right to if you default on the loan. SGBs are eligible to be used as loan collateral.

No TDS on interest payments

Interest payments for bonds are generally subject to TDS (tax deducted at source). However, the twice-a-year interest payments that you receive from SGBs does not attract TDS.

When is the next issue of SGBs

SGBs were first issued by the RBI in Nov 2015. Since then, SGBs have been regularly issued but without a fixed pattern.

While there have been a different number of issues each year, there have always been at least 5 issues per year from 2016 to 2021. 

The pace of issuance has slowed down with only 4 SGBs issued in 2022, with the latest SGB bond issued in Aug 2022.

The next issue of Sovereign Gold Bonds is scheduled for March 2023. It will be the 2022-23 Series IV.

However, if you are keen on buying SGBs immediately, you can consider buying them on the stock exchange. You get two potential benefits – a shorter lock-in period and a possible discount due to lack of liquidity.

Who should invest in SGBs

SGBs are really attractive gold investment options.

As we saw, they are low cost compared to other gold investment options and offer an extra 2.5% interest rate over and above gold price appreciation.

So, if you are looking to add gold to diversify your investment portfolio or make your first gold investment, you should definitely consider SGBs.

How to invest in SGBs?

SGBs can be bought in two ways. You can either buy them from the RBI during the issuance or from the secondary market via the stock exchange.

The RBI launches new issues of SGBs regularly. But the issuance of SGBs dwindled in 2022 and there is no clarity on when the next issue will be launched as of  January 2023.

To buy SGBs during the issue window, you can make an online application via your demat account. You will have to specify the weight of gold you want to buy. The minimum investment required per issue is 1 gram of gold.

Offline process

Offline applications for SGBs are accepted at banks and designation post offices. You will need to fill out a couple of forms and submit them along with one of your bank accounts’ cheque leaves and a copy of your PAN card.

Online process

However, it is better to apply online. Not only do you get to apply from the comfort of your home, but also online applications (with digital payments) get a Rs. 50/gram discount.

Buying SGBs from the stock exchange is the second method of investing in them. You will need a demat account.

As we saw buying SGBs from the secondary market or stock exchange has two potential benefits. First, the lock-in period of your gold bond will be less than 5 years. Second, you are likely to get SGBs at a lower than market rate because SGBs are not very liquid on the stock exchange.

No matter where you buy SGBs from, you will get a Certificate of Holding from the RBI

Are SGBs tax free?

Yes and no!

SGBs are tax free for you only if you hold until maturity (8 years). It doesn’t matter if you are the first buyer of the bond (bought during issue) or someone who bought the bond from the secondary market, your SGB bond is tax free if you are holding it at the time of its maturity.

On the flip side, SGBs are not tax free if you sell your bonds on the stock exchange or back to the RBI after the lock-in period of 5 years (and before maturity).

In this case, you will have to pay capital gains taxes. 

If you sell within 1 year of your purchase, you are liable to pay short term capital gains taxes at the marginal income tax rate applicable to you.

However, if you sell after 1 year of your purchase, you are liable to pay long term capital gains taxes at 20% with the benefit of indexation.

Can you lose money by investing in SGBs

Surprisingly, you can lose money in SGBs. Here are a few conditions in which you lose money:

1. You decide to sell your SGBs in the secondary market (stock exchange) and don’t get a fair price for it
2. You sell it back to the RBI after lock-in of 5 years is over but gold prices are actually far lower than during the time of sale than during the time of purchase

Generally, gold prices have always gone up over long periods of time. But that doesn’t mean they can’t go down. Gold is a volatile commodity at the mercy of market forces at the end of the day.

It is important to know that losing money is a possibility before investing in SGBs.

Can you withdraw SGB before maturity/8 years

Yes!

You can sell your SGBs in the secondary market (on the stock exchange) any time you want. But it may attract capital gains taxes if you make a profit. However, a more likely scenario is that you may not get a fair value for your bonds if there are not enough buyers and will have to sell your bonds at a loss.

You can also sell your SGBs back to the RBI after the lock-in period of 5 years. The RBI will buy back the SGBs twice a year after the 5-year lock-in period has ended. The RBI makes buyback announcements for each tranche at the end of the lock-in period.

SGBs vs FDs

Gold and fixed deposits are two of the most loved investments in India. Let’s see how they compare.