2 months back, my wife had saved about Rs 1 lakh to buy gold. Being a believer in the stock market, I suggested to her that you should invest the money there instead. However, she refused and was insistent on buying gold.
Seeing her strong inclination towards gold, I advised her to invest in Sovereign Gold Bonds (SGB) instead. I explained to her that SGB is one of the best options available for investing in gold, as it offers a fixed interest rate of 2.5% per annum, along with potential appreciation in gold prices.
While my wife was impressed with the idea, she did have some concerns about the long-term commitment. The SGBs come with a fixed maturity period of 8 years, which may not be suitable for everyone. After discussing it further, she agreed to invest in SGB gold for the long term as for any emergency situation we already have an emergency fund in place.
In this article, I am going to discuss every aspect of sovereign gold bonds along with step by step process to invest in this article. If you are already aware of SGB basics then you can skip a few sections.
What is Sovereign Gold Bond
SGB is a financial instrument that falls under the category of debt funds and is a substitute for holding physical gold. The Sovereign Gold Bonds scheme is launched in 2015 by the Indian government to encourage people to invest in gold in a new form of gold bonds. Bonds eliminate the risk and storage cost of physical gold.
RBI issues the Bond on behalf of the Government of India. SGB is denominated in grams of gold like 1 gram, 10 grams, or 50 grams. You invest in cash at the issue price of the bonds and the bonds will be redeemed in cash on maturity.
How Sovereign Gold Investment Works
Government announces the issuance of SGB every 2 or 3 months through a press with a window of 5 days in which you can apply for the schemes.
Next, you can apply for SGB through branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding corporations of India Ltd. (SHCIL), and authorized stock exchanges.
You can apply online or offline both ways. If you meet the eligibility criteria, submit valid identification documents, and paid the application money on time, you will receive the allotment. You can make the payment either in cash (up to Rs. 20,000) or through cheque, DD, or online banking.
You can keep the bonds in your Demat account. You need to make a specific request for the same in the application form itself. You can check the detailed comparison between 5paisa vs Upstox to know about the demat account opening charges.
The price of SGB is determined by the average price of 999 purity gold for the last three days of the week preceding the subscription period published by the Indian Bullion and Jewellers Association Ltd.
You receive interest on SGB at 2.5% p.a paid after every 6 months. The interest is taxable as per your income tax slab.
The tenure of the bond is eight years, with an option to exit after the fifth year. On maturity, you receive the redemption price based on the average closing price of the previous 3 business days.
If you hold the SGB till maturity, the capital gains tax arising on redemption has been exempted from the income tax.
The minimum investment amount for SGB is one gram, and the maximum investment limit is four kg for individuals and Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities.
Features and Benefits of Investing in SGB
Features of Investing in SGBs
Fixed interest rate along with price appreciation
You receive a fixed interest at 2.5% per annum on the investment amount. You receive the interest payment after every six months. Interest return is an additional return to the gold price appreciation return.
You can also earn fixed monthly income by investing 25 lakhs in India.
Lesser liquidity
SGB is less liquid than other forms of gold investment due to its lock-in period of 8 years. You can take premature redemption but only after 5 years.
If held in Demat form, you can trade the SGB on the stock exchange through your stockbroker.
Longer maturity period
The lock-in period for Sovereign gold bonds is 8 years. You can take premature redemption after 5 years.
You can approach the concerned bank/SHCIL offices/Post Office thirty days before the interest payment date for premature redemption but your request will entertain if you raise the request at least one day before the interest payment date.
Tax benefits
The interest earned on SGB is taxable as per your income tax slab. The interest payment will be added to your income and will be taxed as per your tax slab.
There is no capital gains tax on the redemption of SGB if held until maturity. But if you redeem SGB prematurely then you would need to pay the capital gain tax.
- Hold for less than 3 years – Short-term capital gain
- More than 3 years – Long-term capital gain
Collateral security for the loan
You can use SGB as collateral for loans from banks and other financial institutions. The loan-to-value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time.
Sovereign guarantee
SGB is issued by the Government of India, making it a safe investment option. The government guarantees the redemption of SGB at maturity.
You can also check out how to invest your salary in India to understand what other ways are to diversify your portfolio.
Investment limit
You need to make a minimum investment of 1 gram in SGB. The maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts. In the case of joint holding, the limit applies to the first applicant.
Benefits of SGBs
Better return than physical gold
SGB provides better returns than physical gold. You get a 2.5% p.a interest payment along with the gold price appreciation return. In physical gold, you get only a gold price appreciation return after deducting the making charges on the physical gold.
Cheapest way to invest in gold
A sovereign gold bond is the cheapest way to invest in gold. You don’t need to pay any fee to invest in the SGB which is the case with other gold investment options.
- Physical Gold – Upto 10% making charges with purity issues
- Gold ETFs – Upto 1%
- Gold Mutual funds – Upto 2.5%
- Digital Gold – Upto 3%
Low-risk
Investing in SGBs is the lowest-risk investment option as the government of India backs it as compared to other opportunities where third parties are involved.
Protection against inflation
Another benefit of investing in SGB is its ability to protect against inflation. The value of gold tends to increase during periods of inflation, making it an excellent hedge against rising prices.
Tax Benefits
Investing in SGBs also offers tax benefits. The capital gains from SGBs are tax-free if you held them until maturity. Additionally, there is no wealth tax applicable on SGBs, making them an attractive investment option for high-net-worth individuals.
You can also invest in US stocks from India to diversify your portfolio in global market.
Drawbacks of SGB
Lesser liquidity
SGB is less liquid than other forms of gold investment due to its lock-in period of 8 years. You can take premature redemption but only after 5 years.
Longer maturity period
The lock-in period for Sovereign gold bonds is 8 years. You can take premature redemption after 5 years. In case of an emergency, you may find yourself in a tricky situation if you don’t have an emergency fund.
Lower returns compared to other investment methods
If you compare the SGB returns with the stock market or mutual funds then you would find lower returns with SGB.
SGB is the best alternative to other gold investment options but not the best alternative to all the investment options.
No renewal
You cannot renew the bond at maturity. Your Sovereign Gold Bond will be settled as money directly into your bank account on maturity. You can reinvest the entire amount again into the SGBs but that will count from starting for premature redemption.
Step-by-Step Process to Invest in SGB
You can invest in SGB through your bank net banking or your Demat account. You get a discount of Rs 50 per gram on the price of the online application.
I am going to share the step-by-step process to buy SGB through HDFC net banking and Zerodha. The process for other banks and stockbrokers is more or less the same
How to invest in SGB through Zerodha
Step 1 – Login into Coin.zerdha.com using your Zerodha ID and password. You can open a Zerodha account if you have a Demat account.
Step 2 – Go to the dashboard option. Choose ETF & SGB from the dropdown menu
Step 3 – You will find the data like closing date, and per unit price regarding the current SGB
Note – You will see a message “No SGBs are open for sale currently” if there is no SGB announced.
Step 4 – Click on the place order (if SGB investment is live).
Step 5 – Fill in the units that you want to buy and click on the ‘confirm’ button.
You will get a pop-up regarding advice to keep the sufficient balance in your trading account required to place the SGB order.
Step 6 – Tick the box and click on the ‘confirm’ button. Your SGB buying order will be placed.
You can also go through our article on how to invest in mutual funds in Zerodha along with SGB investment.
How to Invest in SGB through HDFC Netbanking
Step 1 – Login into your HDFC net banking
Step 2 – Click on the ‘Offers’ tab in the menu bar
Step 3 – Scroll down, and you will see the banner to invest in sovereign gold bonds. Click on ‘Buy now’.
Note – You won’t see the SGB banner if there is no SGB subscription announced.
Step 4 – A popup message will appear regarding the sufficient balance in your account. Click on ‘Ok”.
Step 5 – Another popup will appear regarding ‘demat account must be activated if you want to receive your SGB in Demat from’. Click on ‘Ok”.
Step 6 – Application for SGB will be opened. Your basic details will be auto-filled like customer ID name, DOB, address, and PAN number. Fill in the blank fields.
Step 7 – Enter the gold units that you want to buy.
Step 8 – Enter the nominee details. You can choose your savings account nominee or you can add a new nominee.
Step 9 – Tick the ‘ I have read and understand terms & conditions” box. Click on the ‘Generate OTP’ button.
Step 10 – Submit the OTP that you receive on your mobile number.
Your application will be submitted. You will receive a reference number that you can save for future reference. You can also get 8% monthly return by investing your 1 Crore in government bonds including sovereign gold bond.
Alternative to SGB to Invest in Gold
You can invest in gold in other ways also like physical gold, gold ETF, Gold Mutual Funds, and digital gold.
Let’s compare all the ways to invest in gold
| Physical Gold | SGB | Gold ETF | Gold MF | Digital Gold | |
| Investment limits | Min – No Max – No | Min – 1 gram Max – 4 kg | Min – 1 gram Max – No | Min – Rs 1000 Max – No | Min – No Max – No |
| Cost | Making charges | No | Upto 1% | Upto 2.5% | Upto 3% |
| Lock in period | No | 8 years | No | No | No |
| Returns | Gold returns – making charges | 2.5% p.a + Gold returns | Gold returns – cost | Performance of the underlying asset – cost | Gold performance – cost |
| Tradability | No | Tradable on Exchange | Tradable on Exchange | Tradable on Exchange | No |
Conclusion
If you are looking to invest in gold in India, then SGBs are the best option among the all available options. I would suggest you invest a maximum of 10% to 15% of your portfolio in gold.
You can diversify your rest portfolio with stocks and mutual funds for better overall returns on your investments.
FAQs
On redemption of SGB, you will receive the redemption price in cash, which is equivalent to the prevailing market price of gold on the redemption date.
If you meet the eligibility criteria, submit a valid identification document and pay the application money on time, you will receive the allotment.
SGBs can be purchased from banks, designated post offices, Stock Holding Corporation of India Limited (SHCIL), and recognized stock exchanges.
Yes, each member of a family can buy up to 4 Kg in their own name.
No, a single investor cannot hold more than one investor ID for subscribing to the Sovereign Gold Bond.
Yes, a minor can invest in SGB through a guardian.
Resident individuals, HUFs, Trusts, Universities, and Charitable Institutions are eligible to invest in SGBs.
Yes, like any other investment, SGBs also carry some risks such as a fall in the price of gold. However, you will not lose in terms of the units of gold which you have paid for.
If the price of gold falls after investing in SGB, the investor will bear the loss. However, if the bonds are held till maturity, the investor will get the redemption price, which is based on the prevailing gold prices at the time of redemption.
Yes, there is a lock-in period of 5 years for investing in SGB.
Yes, SGB can be bought in joint names, with a maximum of three co-applicants. The SGB unit purchase limit applies to the first applicant.
Yes, SGB can be traded on stock exchanges.
The return on investment in SGB is calculated based on the difference between the purchase price and the redemption price.
No, it is mandatory to have a demat account for investing in SGB. But you need a Demat account if you want to hold SGB in demat form.
The redemption price of SGB is based on the average closing price of gold of 999 purity of the previous three business days at the time of redemption.
The issue price of SGB is determined based on the average closing price of gold of 999 purity of the previous three business days from the date of issue.
The interest rate offered on SGB is 2.5%.
The tenure of SGB is 8 years, with an option to exit from the 5th year onwards.
The minimum investment in SGB is 1 gram of gold, and the maximum investment limit is 4 kg for individuals, 4 kg for HUFs, and 20 kg for trusts and similar entities.
The interest income on SGBs is taxable as per the income tax slab of the investor. However, there is no tax on the capital gains from the sale of SGBs if they are held until maturity. If you sell SGBs before maturity, the capital gains will be taxable per the capital gain norms.
Yes, SGBs can be used as collateral for loans from banks, financial institutions, and non-banking financial companies (NBFCs).
You can pledge your SGBs with the lender and get a loan against them. The loan-to-value (LTV) ratio for SGBs is the same as that of physical gold described by RBI.
Yes, NRIs can invest in SGBs in Indian rupees using funds from their NRE or FCNR accounts. The subscription amount and interest on the bonds will be payable in Indian rupees only. NRIs cannot apply for SGBs using funds from their NRO account.
Yes, investing in SGB is better than physical gold. Physical gold has a high making cost to pay at the time of purchase. Physical gold also carries storage and security costs. At the time of sale, you would have lesser value because of purity issues.
On the other hand, SGBs are completely digital, and you don’t have to worry about storage and security. You don’t need to bear any cost to buy and sell the SGB. You also get a fixed interest of 2.5% per annum, which is not available on physical gold.
