• FIC Hansraj

Sovereign Gold Bonds : An Unexplored Investment Avenue

~ By Saanya Khunger and Harshita Goel


Investing in Gold, not in physical form but on paper is a rather unpopular avenue probably due to many alternatives available. Is it possible that an investor, when familiarised with Sovereign Gold Bonds (SGBs), reconsiders his initial decision & embarks in this Market? Read along and form your opinion.


Sovereign Gold Bond | FIC Hansraj
Sovereign Gold Bonds

Launched just 5 years ago, SGB is a bond issued by RBI on behalf of the government, the value of which is backed by the rate of Gold in the market. Investors pay for them in cash and redeem the amount adjusted with the capital gain after the maturity period of 8 years.


The basic & vital question that would initially pop up in an investor’s head would be regarding the return that a particular investment would generate! Risk-averse or moderate risk-takers, SGBs are what you might be looking for. 2.5% interest on the nominal value of your bonds (bi-annually) is definitely guaranteed. Additionally, investors who may be unable to wait till 8 years for redemption have an alternative of trading the bonds on the stock exchange during the tranches notified by RBI. Another crucial factor while calculating the returns of any investment is based on tax or more specifically the capital gains tax(CGT). The distinguishable feature of SGBs is that no TDS & CGT would have to be paid if the investor redeems them after 8 years. Though it’s a long time period, it does generate more gains! To purchase SGBs, the minimum investment to be made is 1 gram of gold which is equivalent to Rs 40-50 approx, therefore, small investors can easily enter this market.


What other factors make this investment special? Well, SGBs can be used as collateral for availing loans. Moreover, a concept known as Indexation can be used to lower the CGT burden. Let's explore this in detail.


If an investor bought an SGB worth Rs 100 equivalent to 2 gms of Gold in 2016, sold it after 3 years in 2019 at Rs 200. As per the norms, he would have paid CGT on Rs 100(i.e the difference between sale value & purchase value) which would come out as 20% of Rs 100 = Rs 20. However, if he used Indexation, he could have adjusted the capital gain in relation to inflation. The Cost inflation index (CII) calculates the estimated rise in the cost of goods and assets year by year as a result of inflation. So, the sale value could be recalculated as 100* (CII of 2019/ CII of 2016) = 100* (254/280) = 110. Then the capital gain would have been Rs 90(200-110) & payable tax would accrue to the amount of Rs 18. Given that an investor would generally invest more than Rs 100, the multiplier effect of indexation would go a long way in reducing the tax load.


While we’re discussing how SGBs can be a great investment avenue, it’s important to know why they should be preferred over the physical and traditional methods. Having said that, unlike physical gold, the risk of theft & costs of storage are low with these bonds.


Sovereign Gold Bonds | FIC Hansraj
Sovereign Gold Bonds

The volatility of prices is the crucial reason for the perennial uncertainty in any market. However, Gold is definitely a safe haven for many because there are limited elements that tinker with its prices. The 2020 situation provides a solid backing to the strong demand for gold & SGBs serve as a great alternative for physical gold & other avenues.


Furthermore, SGB prices are associated with the price of gold of 999 purity (24 carats) published by the India Bullion and Jewellers Association (IBJA), hence, the purity of bonds is not a concern. Since November 2015, RBI has sold SGBs in 38 tranches subsequently. They score over other gold investment avenues as the investor can avail a discount of Rs 50 on the issue price if invested online. SGB-2016-Sr.-I, launched on February 8, 2016, has so far appreciated 89 percent (including coupon payments). This particular SGB series has made a total coupon payment of Rs 286 since its launch.


You’d probably be thinking about cryptocurrency and how it can be a better investment avenue than SGBs but your opinion might change after you get to know that SGBs are available through a window intermittently opened by the government for fresh sale to investors which makes SGBs secure and safe whereas cryptocurrency isn’t a secure investment option and can often lead to fraud due to the anonymity of transactions & operations.


Well, there isn't any investment avenue that can be perfect in its complete sense & its performance cannot be 100% predictable, this applies to SGBs too as their value is governed by the market forces. But gold is an important commodity and the government consistently works to keep its price stable. And if you’ll invest in it for 5-8 years, the chances of capital losses are minimal.


To conclude, SGBs are a secure long-term investment option backed up by the government and exempted from CGT with redemption as per the gold prices. All of this makes SGBs one of the best and safest investment avenues.