SOVEREIGN GOLD BONDS (SGB) AS INVESTMENT TOOL
If we say Indians are a crazy lot for gold it will not be wrong as approximately 20-25 per cent of global production is consumed in India. In India about 700 tonnes gold is imported a year, accounting for over 20% of world jewellery fabrication. The value of import in a year is approx Rs 2.6 lakh.
“ Sonakhareedkerakh lo” ……”Sona le lo shaadi main kaamayega”……”Sonakabhinuksannahideta” are statements which are inherited legacy of each and every household in India. We have all heard these statements from parents and grand parents and it still remains popular belief, which is here to stay for centuries.
The above might be true to a large extent and historically gold has been a good source of investment and comparatively safe and high return yielding as well. People might argue that stock markets will yield high returns as compare to gold, but for a common man who is not stock market savvy and would not like to take undue risks and in these times of nose diving interest rates, Gold would definitely emerge as one of the hot investment opportunity.
It has to be accomplished through a jeweller. The physical buying or selling will have to be done at a jewellery shop or bullion market only. There will always be slight different in buying price and selling price .
- Holding of physical gold, always has the fear factor of the gold being stolen or lost. Safe keeping of gold has to be done with utmost care, as gold stolen or lost is virtually gold lost forever as there is no defined title of ownership of physical gold.
- The sale and purchase will involve physical movement of gold. In times of strict lockdown and unusual circumstances as generated by covid-19 pandemic, the buying and selling would be very cumbersome and difficult.
- The profit generated will be only the difference in purchase price and selling price, with no other benefit arising during the holding tenure of the physical gold. This would be subject to long term or short capital gain as well, depending on the period of holding of gold (36 months or more of holding will be treated as long term and anything less would be short term) .
- There would be some sort of making charges also charged by the jeweller in case gold ornaments or gold coins are bought.
Government of India launched a “Sovereign Gold Bond Scheme” in year 2015. This scheme is a good investment source for the gold hungry Indian population. The drawback being that the holding would be in paper and one will not be able to see physical god in his or her hand. The objective of the scheme is to reduce the demand for physical gold and shift that part of domestic savings used for buying gold into financial savings with inherited value of gold attached to it.
Sovereign Gold Bonds (SGB) have following features and benefits over the physical gold transactions :-
- There is no liability of capital gain, if any, at maturity . This is one of the major benefit of investing in SGB. It may however be noted that bonds if sold or encashed before maturity will be subject to short term or long term capital gain regulations.
- The SGB would earn an interest of 2.5% per annum on the purchase value of the bonds, payable half yearly. This return is absent in physical holding of gold.
- The document of holding can be easily pledged, hypothecated or lien can be raised in favour of banks.
- Nominations can be done, in full or even in parts at the time of purchase or even at a later stage, which will take of possible disputes in case of unfortunate demise of the owner.
- SGB can be easily held in electronic form in depository account, or can be held in form of a paper defining ownership. The risk of holding and cost of storage are totally eliminated.
- The SGB have a maturity period of 8 years, but there is an exit option available to the investor after completion of 5th year.
- SGB can be bought online and payment be done online, sitting at comfort of home or office. There is a further discount of Rs.50 on issue price for payments made online.
SGB is available for purchase only to resident Indian- individuals, HUF, Trusts, Universities and charitable institutions. There is also a cap of minimum investment of 2 grams to a maximum of 500 grams per year per entity.
Historic issue price of SGB
| Nov 2015 | Rs.2684 |
| March 2016 | Rs. 2916 |
| Nov 2016 | Rs. 3007 |
| April 2017 | Rs 2951 |
| October 2017 | Rs 2971 |
| April 2018 | Rs 3114 |
| October 2018 | Rs. 3183 |
| July 2019 | Rs 3443 |
| November 2019 | Rs 3795 |
| February 2020 | Rs 4260 |
| April 2020 | Rs 4639 |
| May 2020 | Rs 4590 |
| June 2020 | Rs 4677 |
Comparative analysis of investment in physical gold vs SGB
| Physical Gold | SGB | |
| Month of Purchase | Nov 2015 | Nov 2015 |
| Purchase price | Rs. 2700 | Rs. 2634 |
| Quantity | 500gm | 500gm |
| Investment | 13,50,000 | 13,17,000 |
| Assumed price in Nov 2023 (after 8 years) | Rs. 7000 | Rs 7000 |
| Value of investment | 35,00,000 | 35,00,000 |
| Long term gain | 21,50,000 | 21,83,000 |
| Interest earned | Nil | 2,63,400 |
| LTGC tax @ 20% | 4,30,000 | Nil |
| Tax on interest @30% | Nil | 79,020 |
| Net gain after tax | 17,20,000 | 23,67,380 |
It can be easily seen from the above that the extra income in SGB over holding of physical gold would be approx. 35% more. This makes investment in SGB over physical gold much more viable and sensible.
The May 2020-21 series of SGB which opened on 11 May and closed on 15 May generated investor interest worth Rs.1168 crore. The bonds were priced at Rs. 5490 per unit. The dates of opening up of window to invest in SGB for next 3 months are as follows:-
2020-21 series IV, 06 July to 10 July
2020-21 series V, 03 August to 07 August
2020-21 series VI, 31 August to 04 September
For further inputs please feel to contact us.