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Complete Guide Of Sovereign Gold Bond Scheme (SGBs). How does it work?
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Gold is one of the best investment assets. Traditionally people have been investing in gold. Gold holds special significance for Indians, as it is considered auspicious. Moreover, this prestigious asset has some emotional and social value. Due to this, the importance of gold increases. However, physically storing gold always comes with risks, costs, and security issues. Therefore, the Government of India launched the Sovereign Gold Bond (SGB) scheme, a form of gold investment.
Both traditional and new investors can earn many additional benefits by investing in it. In simple words, Sovereign Gold Bonds Scheme (SGBs) are debt securities denominated in grams of gold and pay a fixed interest rate of 2.5% per annum to their investors. With this new Sovereign Gold Bond Scheme launched by the government, investing and owning gold has become much easier. Along with this, the storage problem and maintenance of gold have also been decreased by this scheme. Today in this blog, we will know in detail about the features of SGB, its benefits, and how to invest in it how to buy Sovereign Gold Bond?
What is Sovereign Gold Bonds Scheme (SGB)?
Sovereign Gold Bonds or SGBs are government debt securities denominated as gold. The Reserve Bank of India issues SGB bonds on behalf of the government. Sovereign gold bonds are becoming a good alternative to physical gold; hence it is also called digital gold. However, the most important thing is that both the purchase and redemption at maturity are in cash and not in the form of gold.
Sovereign Gold Bond (SGB) was introduced in India in November 2015. In this, you get a certificate; in the certificate format, you are the owner of the gold. A lot of people don't believe it in the beginning. Since SGB is a scheme launched by the government, investing in it is fully transparent and safe, and at the same time, they track the import-export value of gold. They are denominated in grams, and investors can buy them in grams.
The minimum investment limit in SGB is one gram, while the maximum investment limit for individuals and Undivided Hindu families (HUF) is 4 kg. However, the highest investment limit is 20kgs for institutions and trusts.
Do you know that the Sovereign Gold Bonds (SGB) return is in interest and capital appreciation? The investors get a fixed interest at 2.5% per annum. The return on this is also above the increasing price of physical gold yearly. Interest is paid to you every six months. Often these bonds have a minimum tenure of eight years. Later you can increase it if you want. The bonds also mature after this period.
How does Sovereign Gold Bonds Redemption work?
Redemption in SGB is automatically credited to the bank account of the investors. The lock-in period for sovereign gold bonds is 8 years. However, it can be prematurely terminated or withdrawn after the lock-in period of 5 years if one so desires. The investor can also sell his bonds in the secondary markets. The bond can be sold without any limitations. But capital gains are taxed at the same rate as physical gold. The interest earned is taxable, but no TDS is levied at the interest payment or redemption time. Also, at maturity, capital gains on investment income are not taxed.
As the world is moving towards technology, the importance of technology has increased in all things. During the past few years, real gold assets have suffered a sharp fall in demand, while SGB demand has thus far outpaced it.
When people were asked what the main reason behind their doing so is, they said that investing in it gives a certificate, which has the same importance as physical gold. These certificates can be taken as assets. And minimizes the risks associated with storing real gold. In addition, there is no storage and carrying costs for SGB investments.
Anyone who wants can easily invest in SGB through SEBI-authorized agents. All its transactions are done online, and everything is secure. From the purchase of gold to interest accumulation or redemption, all are done through the same bank account.
What are the main features of Sovereign Gold Bonds (SGBs)?
All Indian residents are eligible to invest in the Sovereign Gold Bond Scheme. Any charitable trust, HUF, and university institutions can also invest in SGB. In addition, parents invest on behalf of their minor children.
- Investment / Denomination
The most important thing is that the valuation of gold bonds is done in multiples of grams of gold. That is, one unit is equal to 1 gram. Consequently, the smallest and maximum amounts of gold that can be invested in Gold Bonds are 1 gram and 4 kilograms, respectively (per individual and for HUF). On the other hand, the maximum investment limit for institutions has been fixed at 20 kg gold.
Tenure and Premature Withdrawals
Sovereign Gold Bonds (SGBs) in India have a maturity period of eight years. And it has a mandatory lock-in period of five years. However, the investor can choose to exit the bond after the lock-in period if he desires.
However, one thing must be noted: Exit from the bond is allowed only on the interest payment dates.
Rate of Interest
The current interest rate of Gold Bonds SGB is 2.50% per annum on the investors' initial investment. The special thing is that even on the nominal value of the investment, interest is paid twice a year (half-yearly). The return on this is usually linked to the current value of gold.
- KYC Documentation
Like KYC verification before investing in any stock, you must follow the Know Your Customer (KYC) norms if you want to buy digital gold. Now even KYC verification is done while buying physical gold. For KYC verification, you must complete your KYC by submitting copies of your id proof like PAN, Aadhar card, and address proof like driving license, passport, or voter ID card.
Interest on Sovereign Gold Bonds is also taxable per the IT Act's provisions, 1961. However, it is exempt from capital gains tax applicable to an individual. In addition, the investor is offered indexation benefits on long-term capital gains when the bonds are transferred from one person to another.
- Issuance of Bonds
SGBs can only be issued by the Reserve Bank of India (RBI) on behalf of the Government of India because this is a government program, and they are sold on stock markets. Multiples of one gram of gold are used in its issuance. In addition, investors get a holding certificate in return, which has the same importance as physical gold. Later you can also convert it into Demat form.
Eligibility for SLR
If you have received the bond after going through the process of pledging something by the bank, then they are responsible for the SLR. The statutory Liquidity Ratio (SLR) is the capital that any commercial bank holds in cash, gold, or approved securities before lending to its customers.
- Redemption Value
The best information for you is that as per Sovereign Gold Bonds India, gold of 999 purity is sold at a simple average closing price for the last three days before the subscription period, as well as gold prices published by Jewelers Association Limited and India Bullion, which is denominated in INR.
- Sales Channel
You will not find the availability of SGBs everywhere. The government sells this bond through banks, selected post offices, and the Stock Holding Corporation of India Limited (SHCIL). The government already issues its information. SGBs are traded directly or through intermediaries in recognized stock exchanges (National Stock Exchange of India or Bombay Stock Exchange).
Who is eligible to invest in the SGB (Sovereign Gold Bond Scheme)?
SGBs, operated by RBI, is one of the safest equities to invest in. Investors who prefer gold as an asset can consider investing in the Sovereign Gold Bond Scheme. This is the best choice for beginning investors who wish to put their money into low-risk securities. These bonds come with very low risk. So, the Sovereign Gold Bond scheme is best suited for individuals with a low-risk tolerance level. People can also like this bond because its interest payment is available every 6 months at a fixed rate. In addition, compared to physical gold, the cost of buying and selling SGB bonds is lower.
Gold is auspicious. Physical gold comes with many troubles. By investing in SGBs, you can avoid these troubles, and your gold will be the safest. Consequently, investing in it will pay off for you. The chances of theft are absolutely nil because, as per the bond, your gold is in paper form. Therefore, investing in gold bonds can be the best option for investors looking for good interest investments.
What are the main Benefits of SGBs?
Sovereign Gold Bond is the best alternative to physical gold, and their demand will increase in the coming time.
If the investor desires, these gold bonds can also be used as collateral for loan purchases.
Unlike physical gold, sovereign gold bonds eliminate the risks of storage and maintenance. At the same time, the cost also becomes almost zero.
Most importantly, investors are assured of interest based on market value from time to time during maturity.
There is no purity issue in Sovereign Gold Bonds. It has the same purity as physical gold.
There are no separate making charges for this.
Investors' gold bonds are held in paper form and kept in the books of RBI or in dematerialized form. Thus, there is no risk to its security.
As you all know that every coin has two sides. Similarly, every investment has some risk associated with it. However, there is no risk of losing the gold through theft.
But there may be a risk of capital loss. Fluctuation can be seen in gold due to volatility in the market, which is usually associated with any investment.
The people of India have a special association with gold. Gold is not only seen as an asset, but it also has sentimental value attached to it. It is a tradition in India to buy gold on every auspicious occasion. It is such a desired asset that everyone wants to hold. However, physical gold brings with it some risks and costs. There is a risk of gold being stolen from its proper storage. In such a situation, slowly, gold bonds are becoming an alternative to physical gold in India.
In the certificate format, you hold gold with an equivalent value and get fixed interest payments until the certificate's maturity. Trust me; this is a very attractive investment.
Most of you would be aware that gold can act as a hedge against inflation and currency risk when the time comes. The best part is that investors can invest up to a minimum of one gram in gold. Consider investing in this if you're a novice investor and want to earn good returns with minimal risk.