Soverign Gold Bond: Definition, Features, Price, Eligibility, ROIa

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Written by Arjun Remesh | Reviewed by Shivam Gaba | Updated on 4 June 2024

Sovereign Gold Bonds are government securities denominated in grams of gold issued by the Reserve Bank of India on behalf of the Government of India. SGBs provide an alternative to holding physical gold. The bonds are issued in tranches periodically and are sold through scheduled commercial banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognized stock exchanges like NSE and BSE. 

The key features of SGBs are fixed interest of 2.5% per annum payable semi-annually on the initial investment, sovereign guarantee on principal and returns, and elimination of storage costs and risks associated with physical gold. SGBs have a tenure of 8 years with an exit option after 5 years. The bonds are restricted for sale to resident Indian entities including individuals, HUFs, trusts and also NRIs. The minimum permissible investment is 1 gram and maximum is 4kg for individuals and 20kg for trusts per fiscal year.

SGBs provide exposure to gold prices while also offering the benefits of sovereign securities. Investors do not incur making charges and get assured returns. SGBs can be easily traded on exchanges for meeting liquidity requirements. There are tax benefits as well on interest, capital gains and redemption. 

What is Sovereign Gold Bond Scheme?

Sovereign Gold Bond Schemes (SGB) are government securities denominated in grams of gold. SGBs are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of the Government of India.

What are the features of Sovereign Gold Bond?

The main features of a sovereign gold bond are that they are denominated in grams of gold and carry a sovereign guarantee by the Government of India on both the principal and interest amount. Investors do not incur any storage or security issues, as in the case of physical gold. The bonds offer a fixed rate of 2.5% interest per year, payable semi-annually. There is no capital gains tax on redemption for individual investors. The bonds are tradable on stock exchanges within a fortnight of issuance.

The minimum investment limit is 1 gram and the maximum is 4 kg for individuals and HUFs and 20 kg for trusts in a fiscal year. KYC documentation is the same as is required for the purchase of physical gold. SGB provides exposure to gold prices with the additional benefits associated with sovereign securities. Overall, they offer a convenient and safe means to invest in gold.

What is the Price History of SGB?

Below is the complete price history of SGB.

Who is eligible to invest in SGB?

SGBs can be purchased by any resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. The bonds can also be bought by investors falling under the categories of Resident Indian HUF, Resident Individual, being an adult and of sound mind, singly or jointly with another adult. Non-Resident Indians (NRIs) are not eligible to invest in these bonds. Joint holders are allowed for these bonds, with the first applicant treated as the primary holder. Minors can also invest through guardians. There are no lock-ins on the investment and investors can redeem after the fifth year from issuance. 

How to apply for SGB?

Below are the steps to apply for SGBs.

1. Check RBI calendar for next SGB issuance

RBI announces a calendar at the start of the financial year outlining the schedule for SGB issuances. 

2. Fill application form 

Application forms are available on bank websites or can be downloaded from RBI’s website. Fill in all required details like name, address, PAN, etc.

3. Submit form along with payment

Submit the completed application form along with payment (cheque, demand draft, etc) at your bank branch before the issue closes. 

4. Apply online 

Many banks provide the facility to apply online through net banking. Follow the steps and make payment to complete online application.

5. Get receipt 

You will receive an acknowledgment receipt from the bank/post office/agent after submitting the application.

6. Bonds credited to account

On issuance, bonds will be credited to your Demat account if you have one or a certificate will be sent to your registered address.

Bonds have a maturity period of 8 years. It is important to track the returns. Closer to maturity, follow up with your bank for repayment proceeds.

What is the minimum & maximum limit for SGB investment?

The minimum investment in SGB is one gram, with a maximum subscription limit of 4 kg for individuals, 4 kg for Hindu Undivided Families (HUF) and 20 kg for trusts and similar entities notified by the government per fiscal year. The annual ceiling includes bonds subscribed in different tranches during initial issuance by the government and those purchased from the secondary market. The ceiling on investment does not include the holdings as collateral by banks and other financial institutions. In the case of joint holding, the limit applies to the first applicant only. Payment can be made through cash (up to ₹20,000), cheque, demand draft or electronic banking. 

What is the rate of interest for SGB?

The Bonds bear interest at a fixed rate of 2.50% per annum on the amount of initial investment. The interest is credited semi-annually to the bank account of the investor. The last interest will be paid on maturity along with the principal amount. The interest income earned on the bonds is taxable as per the provisions of the Income Tax Act, 1961. The taxable interest earned on SGBs must be shown in the income tax returns filed by the investors.

What is the maturity period for SGB?

Sovereign Gold Bonds have a maturity period of 8 years. However, an early redemption option is available after the 5th year from the date of issue. At maturity, the redemption proceeds are credited to the investor’s bank account. Investors also opt to receive the redemption proceeds in the form of gold. The bonds are easily traded on stock exchanges if liquidity is required before maturity.

Why you should invest in SGB?

You should invest in SGBs as they provide the benefits of investing in gold without the hassles of physical storage. The bonds are backed by a sovereign guarantee on both interest and principal amount. Investors earn a fixed interest rate of 2.5% per annum on the investment amount. SGBs can be easily redeemed for cash on maturity or sold on the secondary market for liquidity. Investing in SGBs eliminates the risks and costs associated with physical gold purchases and storage, providing a safer alternative within the stock market.

What are the risks of investing in SGB?

The main risk of investing in SGBs is market risk, where the price of gold may decline during the tenure leading to capital loss if sold before maturity. However, the quantity of gold is protected. There is also interest rate risk, where bond prices may fall if market interest rates rise, causing mark-to-market losses if sold early. Liquidity risk exists as the bonds have limited secondary market liquidity, so selling before maturity lead to impact costs. Though credit risk is minimal as the bonds carry sovereign guarantee, there is some redemption risk from potential delays by the issuer. 

How to sell SGB?

Below are the steps to sell SGBs.

1. Check Eligibility 

First, check if your SGBs are eligible for sale. SGBs have a lock-in period of 5 years, so you can only sell them after 5 years from the issue date.

2. Dematerialize the Bonds

You’ll need to dematerialize if you have physical gold or convert them into electronic form before selling. Contact your bank or broker to dematerialize.

3. Decide Where to Sell

You can sell SGBs either through a stock exchange (NSE or BSE) or to authorized banks and agencies. Selling on exchange may mean accepting a discount.

4. Place the Sale Order 

For exchange sale, place a sale order with your broker indicating the quantity and expected price. For sale to banks/agencies, submit a redemption request.

5. Receive Sale Proceeds

You will receive sale proceeds in your bank account. The redemption price is based on prevailing gold rates.

6. Pay Applicable Taxes

You need to pay capital gains tax on profits made, depending on holding period. Interest earned is taxed as income. Consult a tax advisor.

Follow the process carefully to successfully sell your SGBs.

What are the Tax Implications of SGB investment?

The interest earned on SGBs of 2.5% on the face value is taxable and added to investor’s income. Capital gains from redeeming SGBs at maturity are exempt from taxes. If redeemed before maturity, long term capital gains over 1 year holding period attract 10% tax without indexation or 20% with indexation. Short term gains under 1 year are taxed as per income slab. GST and TDS are not applicable on SGB transactions