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Gold Investment in India: All details you need to know about Sovereign Gold Bonds and 7 points of comparison of SGBs with Physical gold and Gold ETFs

Gold Investment in India: All details you need to know about Sovereign Gold Bonds and 7 points of comparison of SGBs with Physical gold and Gold ETFs

In India, buying gold during the festival season is common. The precious yellow metal has long been considered an inflation hedge. It gives your financial portfolio stability in addition to diversification. During uncertain times, it safeguards and increases growth.

Over the last decade, two gold investment products in paper form with actual gold in form of the underlying asset have emerged in India: the Gold Exchange Traded Fund (ETF) and the Sovereign Gold Bond (SGB).

Both keep track of gold prices and make it possible for investors to purchase gold without having to keep it physically. Investing in the digital version of gold is appealing due to the simplicity of transaction, tax efficiency, low costs, safety, convenience, and a variety of other benefits.

Sovereign Gold Bonds

Sovereign Gold Bonds are a type of government-issued gold bond.

Sovereign Gold Bonds (SGBs) are a great way to  make investment in gold without having to buy it. You may benefit from capital appreciation in addition to annual interest with these bonds. These bonds, which are issued by the Indian Government, reduce a number of risks associated with actual gold.

In November 2015, the Indian government launched the Sovereign Gold Bond (SGB) Scheme to provide investors with an alternative to actual gold. Over the years, the market has experienced a reduction in demand for physical gold which is significant. SGB not only keeps track of the asset’s export-import value, but in addition it assures transparency.

SGBs are government securities valued in gold grams. They aren’t designed to be substituted for real gold. The issuing price has to be paid in Cash, and the bonds have to be redeemed in Cash at the time they reach maturity. The bond is issued on behalf of the Indian government by the Reserve Bank of India.

 

SGBs are government-issued securities that are thought to be safe. Their value is determined by the number of gold grams they contain. SGBs have seen a large growth in investors, since they are considered a viable alternative to actual gold.

If you want to buy an SGB, all you have to do is contact a SEBI-registered agent or broker. The amount determined by Authorities as per the current market value will be transferred into your registered bank Account after you have redeemed the bond.

Who should consider to invest in SGBs?

when people want to diversify their portfolio with at least 5% to 10% Gold ideally they should make investment in SGBs. Because it is a low-risk investment, it is appropriate for people with a low risk appetite. The cost of purchasing or selling SGBs is quite inexpensive when compared to actual gold.

 

If compared to real gold, the cost of purchasing or selling the SGB is very minimal.

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SGBs are a good option for those who don’t want to go through with the headaches of keeping actual gold. This is due to the reason that it is simple to keep in Demat form, and no one can steal it because it is in electronic form.

Sovereign Gold Bonds Features

Eligibility Criteria

The SGB is available to everyone who is an Indian resident defined by the Foreign Exchange Management Act of 1999. Individuals, HUFs, Trusts, Universities, and charitable organisations are all entitled to participate in investing. Individual investors who switch from resident to non-resident status can maintain their SGBs until they are redeemed or prematured.

SGB is open to all Indian residents, which includes Individuals, Trusts, HUFs, charitable institutions, and Universities. You can buy bonds into a Minor’s Account given that The minor’s guardian has filed the application on his or her behalf. Individuals, HUFs, Trusts, Universities, and Charitable Institutions would be able to purchase the bonds because they are available to residents of India.

Individuals who apply online using ICICI Bank’s Internet Banking Channel and iMobile App are the only ones who can get the bonds. Customers who fit into the other categories of investors, on the other hand, can go to the branch and fill out an application form to apply for the tranche.

 

Denomination/Value

The bonds will be denominated in units of one gram of gold and multiples of that amount.

The bonds are priced in gold gram(s) multiples, 1 gram is used as the base unit. One gram of gold is the minimum investment at Initial level, with a maximum investment of four kilograms of gold per investor (Individual and HUF). 20 kg of gold are authorized for Trusts and universities.

In other words 1 gram of gold will be the minimum investment size allowed. Individuals have a maximum subscription limit of 4 kg, Hindu Undivided Families (HUF) have a maximum subscription limit of 4 kg, and Trusts and similar organisations have a maximum subscription limit of 20 kg, declared by the government from time to time.

Tenure

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The sovereign gold bond will mature in eight years.You can choose to leave the bond after the fifth year (only on interest payout dates). The bond will have an eight-year tenor, with an exit option available starting in the fifth year on interest payment days.

Rates of Interest

On your original investment, the current Interest Rate for SGB is 2.50 percent per year. The investor’s Bank Account will be credited with interest twice a year, with the final interest and Principal will be payable at maturity. The current gold market price is usually used to calculate returns. Investors will receive interest on their Initial Investment at the Rate declared by the RBI at the time the tranche was launched, paid semi-annually.

Issue of bonds

SGBs are issued by the Reserve Bank of India on behalf of the Central Government and are traded on the Stock Exchange. Issuing banks, SHCIL Offices, selected Post Offices, and agents shall disseminate the application form. It is available for download on the RBI’s website. Banks may provide an online application process.

It’s only available in ‘One-Gram’ increments. It will be accompanied with a Holding Certificate for investors. It is possible to convert it to Demat form.

Documentation for KYC

When buying real gold, you must follow the same Know-Your-Customer (KYC) guidelines.

 For verification, you must submit copies of your identification evidence, like your PAN card, and your Address Proof including your passport, driver’s licence, or voter’s ID card. Every application must be accompanied with the investor’s ‘PAN Number,’ which is provided by the Income Tax Department.

Treatment in Taxes

According to the requirements of the 1961 Income Tax Act, the interest on Sovereign Gold Bonds is taxable. Individuals are free from paying capital gains tax when they redeem their SGBs after matuirty. Long-term capital gains are  granted indexation benefits to investors or when the bond is transferred from one person to another.

SLR Qualification

If banks bought bonds after invoking lien, Hypothecation, or pledging, they had to Account for SLR. The Statutory Liquidity Ratio is the amount of capital a commercial bank must have in Gold, Cash, and authorized securities before it may extend credit to consumers.

Price of Redemption

The redemption price will be decided in Indian Rupees and will be based on a simple average of the closing price of gold of 999 purity declared by the India Bullion and Jewelers Association Limited over the three working days before the payback date. Both interest and redemption funds will be credited to the customer’s Bank Account provided at the time of purchase.

One month before the  maturity of bond, the investor will be notified of the bond’s upcoming maturity.

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On the maturity date, the monies will be credited to the Bank Account mentioned on the record.

If valuable information, like Account numbers or email addresses, changes, the investor must notify the bank/SHCIL/PO possible at the earliest.

Channel of Distribution

As may be stated, the government sells bonds through banks, the Stock Holding Corporation of India Limited (SHCIL), and some Post Offices. SGBs can  be traded directly or through intermediaries on recognised Stock Exchanges like National Stock Exchange of India or the Bombay Stock Exchange).

Commission

For the distribution of the bond, the receiving Offices will charge a fee of 1% of the total subscription amount. They will split at least half of the commission with middlemen (agents or brokers).

Unique Investor ID

Each investor can only have one investor ID that is given to one of the identity papers. For all latter investments in the plan, the unique investor ID will be used. In order to hold securities in de-materialized form, you must provide your PAN on the application form. With more than one investor ID, an investor cannot subscribe to the Sovereign Gold Bond.

Authorised Agencies

Bonds can be acquired directly through Offices or branches or through agents from Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL), and licenced Stock Exchanges.

Nomination

under the terms of the Government Securities Act 2006 and the Government Securities Regulations, 2007, a nomination mechanism is available. Along with the application form, there is a nomination form. Because he is a nominee of a dead investor, an Individual Non-Resident Indian (NRI) may have the security changed to his name if the following conditions are met:

1.The Non-Resident investor must retain the security until it is redeemed early or matures; and

2.The investment’s interest and maturity profits are not repatriable.

Demat Form of bonds

A Demat Account is used to store bonds. This must be stated clearly in the application form itself.

Until the dematerialization operation is completed, the bonds will be kept in the RBI’s Records. The option to convert to demat will be available after the bond has been allocated.

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What are the investing minimum and maximum limits?

The Bonds are available in one-gram gold denominations and multiples of one-gram gold values. The minimum investment in the Bond is one gram, with a maximum subscription limit of four kilograms for Individuals, four kilograms for Hindu Undivided Families (HUF), and twenty Kilograms for Trusts and similar entities determined by the government from time to time per fiscal year (April – March).

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For HUFs Each family member can purchase bonds in his or her own name if he or she meets the eligibility requirements set out . For a joint holding for that specific application, the maximum limit will apply to the first applicant. The ceiling limit for a year will apply to bonds acquired from the Secondary Market in addition to the bonds subscribed to in different tranches during the government’s Original Issue.

Because the maximum has been set on a fiscal year (April-March) basis, an investor or Trust can purchase 4 kg/20 kg of gold per year. Banks and other financial institutions will be exempt from the investment ceiling since they retain collateral.

Is Premature redemption allowed?

Despite the bond’s 8-year tenor, early encashment/redemption is allowed on coupon payment days after the fifth year from the date of Issue. If kept in demat form, the bond will be tradable on Exchanges. It can be given to another investor who satisfies the requirements.

Investors can attend the appropriate Bank/SHCIL Offices/Post Office/Agent 30 days before the coupon payout date if they want to redeem their coupons early. Only if the investor visits the competent bank/post office at least one day before the coupon payment date will a application for premature redemption be considered.

The funds will be deposited into the customer’s Bank Account, which were provided at the time of purchase.

What happens when an Investor dies

The bond’s nominee/nominees may file a claim with the appropriate Receiving Office. The nominee/nominees’ claim shall be honored in accordance with the provisions of the Government Securities Act of 2006, and Chapter III of the Government Securities Regulations of 2007.

Claim of the executors or relatives of the dead holder or claim of the holder of the succession certificate (issued under Part X of the Indian Succession Act) may be made to the Receiving Offices/Depository if there is no nomination.

 

It should be emphasized that the aforementioned restrictions are applicable to a dead minor also who has made investment. In the event of death of the minor, the title to the bond will pass to the Individual who meets the qualifications set out in the Government Securities Act of 2006 and not necessarily the natural guardian.

 

Benefits of Sovereign Gold Bonds

Because the investor receives the current market price at the time of redemption/premature redemption, the amount of gold for which he paid is considered safe. The SGB is a preferable alternative to physically keeping gold. Storage hazards and costs are no longer a concern.

Investors are provided the market value of gold at maturity in addition to monthly interest. For the gold in jewelry form, SGB is free of risks including manufacturing charges and purity. The bonds are held in the RBI’s Records or in demat form, which eliminates the risks of scrip loss.

Absolute Protection

Except for market concerns, Sovereign Gold Bonds carry none of the risks associated with real gold. Here, there are no making charges or designs or trash costs.. Furthermore, unlike real gold, which is a dormant investment, SGBs pay interest.

Ownership without risks

Gold ownership without physical custody is simple, with no risks or storage costs. There’s a risk you’ll lose money if the price of gold decreases. The investor, on the other hand, does not lose money on the gold units he acquired.

Extra Money

The most current Fixed Rate is 2.50 percent, and you may earn a fixed Interest Rate of 2.50 percent yearly (on the issue price of bonds).

Benefits of Indexation

Long-term capital gains from bond transfers are eligible for indexation benefits. The nominal value and the interest generated are both remunerated by the government.

The capital gains tax due on the redemption of SGB by a person has been exempt under tax laws. Long-term capital gains resulting from the transfer of a bond will be eligible for indexation benefits.

TDS Applicability

TDS does not apply to the bond. However, it is the bondholder’s duty to follow the tax regulations.

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Tradability

Within a certain time  bracket gold sovereign bonds can be traded on stock markets (at the discretion of the issuer). For example, after five years of investment, you can sell them on the National Stock Exchange or the Bombay Stock Exchange, among other Stock Exchanges. Bonds will be tradable on Stock Markets once they are issued on a date that the RBI will announce.

The bonds will be traded from a date that will be announced by the RBI. (It should be emphasized that Stock Exchanges can only trade bonds stored in demat form with depositories.) The Government Securities Act of 2006 allows the bonds to be sold and transferred. Bonds can be transferred in part.

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Transfer-ability

Bonds are transferable only through the signing of a Transfer Instrument in line with the terms of the Government Securities Act. The bond can be given/transferred to a relative, acquaintance, or anyone who meets the qualifying requirements .

The Bonds will be transferable before maturity in line with the requirements of the Government Securities Act 2006 and the Government Securities Regulations 2007 by executing a Transfer Instrument available from the issuing agents.

Collateral

SGB is accepted as Collateral/security by some banks for loans committed in Demat form. As a result, after fixing the loan-to-value (LTV) ratio to the value of gold, they will consider it as a Gold Loan. This is decided by the India Bullion and Jewellers Association Limited.

These securities can be used as collateral for loans from banks, financial institutions, and non-banking financial firms (NBFC). The Loan to Value Ratio will be the amount set by RBI from time to time for traditional gold loans.

Granting a Loan against SGBs would be the sole decision of Bank/Financing agency’s decision, and could not be considered a matter of right.

 

The person will aquire the allotment provided he or she satisfies the eligibility conditions, shows a valid identity document, and pays the application fee on time.

Customers will get a Certificate of Holding on the day the SGB is issued. If an email address is supplied in the application form, the certificate of holding may be picked up from the issuing Banks/SHCIL Offices/Post Offices/Designated Stock Exchanges/agents or acquired directly from RBI through email.

Customers can apply online at one of the mentioned scheduled commercial banks’ websites. The issuance price of the Gold Bonds will be Rs.50 per gram less than the nominal value for those investors who apply online and pay for their application through Digital Method.

The applicable tranche’s gold price will be announced on the RBI website two days before the issuance starts.

Cash (up to Rs.20,000)/cheques/demand drafts/electronic fund transfers are all acceptable methods of payment.

The Reserve Bank of India has set up a dedicated e-mail address to accept questions on Sovereign Gold Bonds from the common people. Investors can send their questions to this address.

 

Comparison of Sovereign gold bonds with Physical gold and Gold ETFs

1.Returns / Earnings

The returns of physical gold is lower than real return on gold due to making charges, Gold ETFs returns are less than actual return on gold too but Sovereign Gold Bonds provide More than actual return on gold.

2.Safety

keeping physical gold has high risk of theft, wear/tear and burglary.

However Gold ETFs and Soverign Gold Bonds are considered safe.

3.Purity

The purity of gold  is always  a question in buying physical gold but  both Gold ETFs and soverign gold bonds Purity is high because they are made available  in electronic form

4.Capital Gains

Physical gold,Gold ETFs and  Sovereign Gold Bond all three attracts LTCG after three years but No capital gain tax for soverign gold bonds if redeemed after maturity.

5.As a Loan collateral

Physical gold and sovereign gold bonds, but not gold ETFs, are acceptable as loan security.

6.Tradability or exit formalities

Tradability or exit formalities for Physical Gold is Restricitve , gold ETFs are Tradable on Stock Exchange and Sovereign Gold Bond Can be traded and redeemed from the 5th year with the government.

7.Storage expenditures

Storage expenditures are high for keeping physical gold but minimal in case of both Gold ETFs and Soverign Gold Bonds.

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Because gold ETFs are traded on Stock Exchanges like shares, they have a higher level of liquidity than other Gold Assets. Gold ETFs can be entered and left at per one’s convenience because there is no lock-in period. Gold ETFs are a good option for investors with a short to medium-term investing horizon.

Gold prices are expected to rise, according to market Analysts because Financial Markets across the world show signals of turbulence. This makes investing in gold through SGBs and ETFs  a viable option.

They not only give you good profits, but they help you diversify your portfolio. Because they are low-cost, tax-efficient, and low-risk, people should  make investments in these Assets after analyzing their investment term and future Cash requirements. It’s usually a good idea to keep your gold investment to 5-10% of the total value of your investment portfolio.

This is because gold prices have a good likelihood of remaining steady for a long time and failing to provide the desired results. Covid’s global economic turmoil is expected to last for a few more years. Gold bonds and gold exchange-traded funds (ETFs) are both good digital gold investments. When compared to previous records of high gold prices, gold prices are roughly 10% lower.

Both gold ETFs and SGBs have distinct characteristics that make them appealing to different types of investors. Which one an investor should select is primarily determined by their needs and investment horizon.

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