RBI’s Sovereign Gold Bond Scheme Open For Subscription. Should You Invest?

A fresh tranche of the Reserve Bank of India’s (RBI) Sovereign Gold Bonds (SGB) Scheme 2021-22 opened for subscription on Monday. The issue will remain open till October 29. Post subscription, the bonds will be issued on November 2.

What are Sovereign Gold Bonds?

“Sovereign Gold Bonds are gold bonds issued on behalf of the Indian government by RBI. The gold in this bond is sold on a unit-by-unit basis, with each unit's value derived from the underlying 1 gm of 999 quality gold. The price is determined by averaging the closing gold prices for the three working days before the subscription period,” says Renisha Chainani, head of research, Augmont Gold For All, a gold firm that deals from refining to retailing,

She adds that SGB can be purchased from banks, brokers, post offices, and online platforms. The bonds can be purchased in physical, digital, or dematerialized form. To encourage investors to acquire SGBs online, a discount of Rs 50 per gm is granted to those who do so digitally. In addition, RBI issues certificates to all investors.

Throughout the year, RBI releases fresh series of SGBs for sale in the market. So, if you missed the most recent one, you can always wait for the next one to be released. Investors who do not wish to purchase directly from RBI can do so in the secondary market, which includes stock exchanges.

Should you invest?

“SGB is a fantastic choice for those who want to buy gold solely for investment purposes. It also offers tax advantages when it matures, but it is not intended for trading,” says Chainani.

Further, SGBs ensure that the quality of gold is maintained and that investors are safeguarded from risk. SGB, on the other hand, can also be used as collateral for loans. “As gold has given more than 10 per cent CAGR (compounded annual growth rate) on a long-term basis, an additional 2.5 per cent makes it more appealing. I would recommend that SGB should constitute around 10 per cent of one’s portfolio,” she adds.

Things To Keep In Mind

There are a few things you need to keep in mind before investing in SGBs.

The first is tenure. “The series is issued with an eight-year fixed tenor, although RBI allows for early redemption after five years from the issuance date. On the payment dates of the coupons, redemption is permitted. If kept in Demat form, these bonds are also marketable on stock exchanges and can be bought and sold through Demat accounts,” says Chainani.

The next is the tax aspect. The interest on the bonds will be taxable under the Income-tax Act, 1961. The capital gain on these bonds' maturity amount is totally tax-free, making them appealing to long-term investors. Long-term capital gains accruing from any person on transnational transactions shall be eligible for indexation benefits.