Sovereign Gold Bonds (SGB) - All You need to know

Sovereign Gold Bond -Benefits | Returns | Tax | Maturity

Sovereign Gold Bonds ( SGB)offered by Reserve Bank Of India (RBI) is one of the best investment options available in India for people looking to accumulate / invest in Gold for longer periods of time.

Some of the major reasons why people purchase Gold are

  1. For immediate consumption through ornaments for marriages / functions etc.,
  2. For accumulating Gold in small amounts for a event after many years (Eg: Many families start purchasing and accumulating Gold as soon as a Girl child born in the family which will be after 20-25 years. The basic assumption of this behaviour is that it is difficult to accumulate all required Gold for marriage at that time)
  3. For investment purpose by purchasing Gold Coins / Biscuits to benefit from the rise in Gold Prices

If we see, for the first purpose (For immediate requirement of gold for use) the only option is to purchase gold. But for any other reason most people do the mistake of purchasing gold in Physical form which is not a good option, specially if such investment is for longer period of times.

How to Invest in Sovereign Gold Bonds:?

Sovereign Gold Bonds can be purchased in online mode or offline mode.

The application form will be provided by the issuing banks/SHCIL offices/designated Post Offices/agents. It can also be downloaded from the RBI’s website.

Banks / stock brokers etc., provide online purchase option too. If investors apply and purchase by paying online, they will get a benefit of 50 rupees on each gram of gold they purchased.

For example if the price of the gold / gram is 4500 rupees in offline mode, it will be only 4450 (50 rupees less) if investors purchase these bonds online

What is the Purchase price / Maturity Price of SGB (Sovereign Gold Bond)?

The Issue Price of Gold Bonds is fixed on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited, for the last 3 business days of the week preceding the subscription period.

On maturity, SGBs will be redeemed in Rupees and the redemption price is based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

Why one should purchase sovereign gold bond scheme?

Sovereign Gold Bonds are offered by RBI on behalf of Government of India is one of the best option to invest in gold due to the reasons below

Additional Return of 2.5% Annual Interest :

All investments in SGB will provide an additional return of 2.5% in the form of fixed interest paid by the RBI. This is in addition to the price increase in Gold for the investment Period. This interest is paid to the investor’s bank account once in 6 months.

Eg: If an investor invests 1,00,000 in Sovereign  Gold Bond Scheme, RBI will issue 20 units equivalent to 20 grams of Gold (In this example 1 Gram gold price is assumed to be 5000 Rupees) and on the investment of 1,00,000 Annual interest will be 2500 rupees which will be paid once in 6 months on coupon dates (1250 rupees each once in 6 months). This amount is in addition to the actual profit on the increase in the price of the gold

No Capital Gain Tax on Redemption (Maturity) of SGB

The important tax benefit in investing SGB is there is no capital gain tax if the investment is hold till maturity of the bond. The maturity of Sovereign Goldbond is 8 Years. If the bond is sold before maturity, there is no capital gain tax benefit available and investor need to pay capital gain tax on the profit amount.

If investment holding period is less than 36 months ( 3 years), the profit amount is added to the investor’s income and taxed accordingly. If investor is in 10% tax slab she will pay 10% tax on the capital gain, if she is in 30% tax bracket, she will pay 30% tax on this capital gain which is known as STCG (Short Term Capital Gain)

If investment period is more than 36 months, then the capital gain is eligible for indexation benefit and investor need to pay 20% tax after adjusting the capital gain for indexation. Capital Gains above 36 months in gold is Long Term Capital Gain (LTCG)

Above 2 taxes (LTCG and STCG) are payable ONLY if investor exits from the bond before maturity. In other words, to be eligible for Capital Gain tax exemption investors need to hold the bonds for entire 8 years.

Example of the tax benefit on SGB

Scenario 1:

Investment Amount in 2021: 1,00,000

Redemption (Maturity) Amount after 8 years in 2029: 2,00,000

Capital Gain = 2,00,000 -1,00,000 = 1,00,000 ( As bond is held from issue to maturity investors need not to pay any tax on this amount)

Scenario 2:

Investment Amount in 2021: 1,00,000

Redemption Amount after 2 years in 2023: 1,20,000

Capital Gain = 1,20,000 -1,00,000 = 20,000

Investor in Tax Bracket of 30%

STCG (Short Term Capital Gain Tax)  to be Paid by Investor = 20000 * 30% = 6,000 Rupees

Scenario 3:

Investment Amount in 2021: 1,00,000

Indexed Purchase Price= 1,30,000 (Assuming 30% increase in indexation index in 5 years)

Redemption Amount after 5 years in 2026: 1,50,000

Capital Gain = 1,50,000 -1,30,000 = 20,000

LTCG (Long Term Capital Gain Tax)  to be Paid by Investor = 20000 * 20% = 4,000 Rupees

SGB as Collateral for Loan

One of the reasons people purchase physical gold (as ornaments and coins / biscuits) is that they can avail loan by pledging them in bank / NBFC etc., Sovereign gold bonds can also be used to avail loan from banks at the same LTV (Loan To Value) as physical Gold (Approval of loan is at the discretion of the bank). As SGB’s can be held in demat account also, they can be pledged for availing loan with low processing charges and expenses compared to pledging physical gold.

Are Sovereign Gold Bonds Safe?

There is always a risk of theft with physical gold. But SGBs are issued either in demat form or as Certificate of holding at the option of the investor. They are highly secured as they are stored in digital format in demat. Also the maintenance cost is very less compared to physical gold. No chance of fraud, or problem with purity. Also there is no need to secure the investments in SGBs in lockers as they can be held in digital format with highest safety.

Maturity / Redemption / Liquidity of SGB

SGBs are issued for a period of 8 years. All these bonds are listed on stock exchange and investor can sell their bonds in exchanges at any point of time without waiting till the maturity time of 8 years ( Please note that the liquidity of these bonds on stock exchange is very low). Investors can transfer these bonds in demat format to other demat holders too in offline mode.

Also investors has the option to redeem the units after completion of 5 years with RBI. All these redemptions will be on the coupon date only (Every 6 months). Investors who want to redeem their bonds need to contact the office / broker / bank / post office where they purchased these 30 days before the interest coupon payment date. Request can be given up to 1 working day before the coupon date. In other words, investors will have option to redeem their units after holding them for 5 years and they can use this option twice in a year on the coupon payment date.

At the maturity of the bond at the end of 8 years, the redemption amount along with the last coupon payment will be credited to investor’s bank account

Example of sovereign gold bond returns at maturity


Investment Amount in 2021: 1,00,000

price of 1 gram of gold : 5000

No of Units : 100000/5000 = 20

Price of 1 gram gold in 2029: 10000

Redemption (Maturity) Amount after 8 years in 2029: =10000* 20 = 2,00,000

Return on Investment = 200000 – 100000 = 100000

Interest Received in 8 years = 2500 per year * 8 = 20000

Total Return = Capital gain (loss) on Gold + Interest

AS can be seen from the example sovereign gold bond returns are dependent on the price of the gold at the time of redemption / maturity. If the price of the gold increases sharply, profit will be high. If the price of gold at the time of redemption / maturity is less than the purchase price there will be capital loss.

Investment Limits in Sovereign Gold Bonds

Minimum investment is 1 gram and maximum is 4KG (4000 grams) in each financial year by individuals. In case of joint holding, the limit applies to the first applicant only. If a family has 4 eligible investors, they can purchase up to 16 KG of gold in a financial year (4KG per each individual X 4 family members). Even minors can invest in these bonds and such investments are to be made by guardians on behalf of the minors.

Who is eligible to invest in the SGBs?

Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.





Leave a Comment

Your email address will not be published. Required fields are marked *