Arthgyaan

Supporting everyone's personal finance journey

FAQ: Sovereign Gold Bond (34)

Please use the Find feature of your browser to look for specific items of interest.

What is a Sovereign Gold Bond?

A Sovereign Gold Bond (SGB) is a piece of paper issued (in digital form) by the Government of India with the following features. For every unit of SGB purchased, the investor will:

  • buy it when issued at the current price of 1 gram of gold
  • get 2.5% interest (paid as 1.25% every six months; fully taxable at slab rates) on the invested amount
  • get back money as per the prevailing price of gold in eight years. Money received may be higher or lower than the purchase price and cannot be predicted in advance
  • if desired, sell it via the stock exchange five years after issuance
  • there are no capital gains taxes if held until maturity for eight years. Else, you will need to pay taxes based on the holding period
⬆️ Back to top

Can NRIs invest in SGB?

Fresh investments in SGB is not allowed for NRIs. Residents who have become NRI may continue holding existing SGB until maturity or may exit via the secondary market. NRIs cannot repatriate the interest and maturity amount.

⬆️ Back to top

Can SGB be used to get loans?

Banks and NBFCs, at their discretion, may allow SGBs to be used as collateral for loans. The loan-to-value (LTV) ratio will be as per the LTV of gold loans.

⬆️ Back to top

Can SGB have nominees?

During filling out the application form, there is an option of adding nominee details. This nominee should be a resident Indian. In case the nominee is not a resident Indian at the time of death, the nominee must:

  • hold the SGB until maturity or exit as per normal exit rules
  • NRIs cannot repatriate the interest and maturity amount
⬆️ Back to top

How is SGB taxed?

Tax on SGB is calculated like this:

  • 2.5% interest is taxed at your slab rate (10%, 20% or 30%)
  • if you sell on the stock exchange then capital gains tax is to be paid: at slab rate if held for less than 3y, at 20% post indexation for longer periods
  • zero tax if the bonds are redeemed after the first five years has passed
  • zero tax if the bonds are held to maturity for the full 8 year term
⬆️ Back to top

How is the interest on SGB calculated?

The 2.5% interest on SGB is calculated on the issue price. This interest is paid at the rate of 1.25% every 6 months on the issue price and is taxable. If you buy SGB from the secondary market, still the interest is calculated on the issue price only.

⬆️ Back to top

How is the price of SGB determined at issue?

As per RBI, the price of SGB is fixed in Indian Rupees based on the simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited for the last three working days of the week preceding the subscription period. Retail investors get a ₹50/unit discount if they apply online. RBI will issue a Press Release stating the Bond’s issue price before the new issue opens.

⬆️ Back to top

How to exit the investment?

After 5 years have passed post-issuance i.e. in the 5th, 6th or 7th year, the investor may approach the same channel from where they purchased the bond. As long as the application is processed at least a day before the coupon payment date, the maturity amount, based on the current gold price, will be credited to the investor’s account.

⬆️ Back to top

How to invest in SGB in primary issuance?

Primary issuance happens in tranches with RBI announcing new dates for SGB. The application, mandatorily based on PAN number, may be made via resident Indians, not NRIs, by filling the application form online/offline and depositing the form with issuing banks, SHCIL offices, designated Post Offices or agents. There is a 50/gm discount on online application. A Demat account is not needed. Some banks like SBI allow fully online application via Netbanking. Investors will be given an unique investor Id based on their PAN.

⬆️ Back to top

How to pay for SGB at issue time?

Either cash (upto 20,000) or demand draft, cheque or electronic payment is accepted for applying for SGB issuance.

⬆️ Back to top

How to transfer SGB?

SGB can be gifted/transferred to other eligible investors by filling out a form or via selling on the stock exchange. However, such transfers lead to capital gains tax.

⬆️ Back to top

How to use SGB as collateral for loans?

Banks and NBFCs, at their discretion, may allow SGBs to be used as collateral for loans. The loan-to-value (LTV) ratio will be as per the LTV of gold loans.

⬆️ Back to top

Is a demat account needed to invest in SGB?

Primary SGB issuances do not require demat account since you can apply using your bank. However, if you are buying from/selling in the secondary market, the trade goes like any other stock and needs a demat account.

⬆️ Back to top

Is allotment guaranteed during primary issuance?

If the application is valid and the applicant is a resident Indian with PAN number, then allotment will happen. There is no bidding like RBI bonds or book-building like IPO.

⬆️ Back to top

Is joint holding of SGB allowed?

Yes, the application form can be filled in join holding mode.

⬆️ Back to top

Is my money safe if I invest in SGB?

The government guarantees that on SGB maturity date, you will get back money based on the current gold price. This might be higher or lower than what you invested. SGB is therefore, not a capital guaranteed product. If you have one unit of SGB and gold price is 4000/gm at the time of maturity, you will get only 4000 irrespective of how much you paid at the time of SGB issuance or from the secondary market. The 2.5% interest is based on the issue price and not current price of gold.

⬆️ Back to top

Is SGB better than buying physical gold?

SGB, being an electronic instrument, does not have the storage or safety issues of physical gold. There is no GST on SGB purchases. Investors get a 50/gm discount if they purchase SGB online. If their purpose is to buy physical gold any time after the maturity of SGB, it is a better option compared to physical gold since the government guarantees that you will get back the current price of gold on the maturity date.

⬆️ Back to top

Is SGB good for long term?

SGB is currently offered for 8 years maturity. There is no guarantee that SGB as a product will exist in the future once the currently active issues mature. If the plan is to hold gold for decades, you need to find an alternative investment that tracks the price of gold if SGB is not available. If SGB is available once your investment matures and your purpose is served, then you can roll your investment into another series of SGB.

⬆️ Back to top

Should you buy SGB from the secondary market?

SGB can be purchased from the secondary market via the stock exchange if you wish to match a requirement for gold purchase with the SGB maturity date. Also, sellers desperate to exit SGB may offer these bonds at attractive prices. You need to check the current price of SGB vs the current India Bullion and Jewellers Association Limited gold price and also the present value of the 2.5% coupon payments.

⬆️ Back to top

Should you invest in an open SGB issue?

You should consider SGB investment in terms of overall portfolio allocation to gold. You can go ahead if you need physical gold when the SGB matures or a bit later. If you are investing as a part of your investment portfolio then be mindful you cannot rebalance with SGB since exits can happen after 5 years and only via selling in stock exchange where you may not get a good price.

Click here to read the related article.

⬆️ Back to top

Is SGB tax free if purchased from secondary market?

Yes, if you hold it until maturity.

⬆️ Back to top

What are the benefits of SGB?

SGB is digital (no storage/theft risk like physical gold), guaranteed by the government (to get back money as per the current value of gold) and also the only gold investment that provides interest income (2.5%, taxable). SGB can be used as loan collateral or margin trading (after appropriate haricut is applied).

⬆️ Back to top

What does it mean if SGB trades lower than the current gold price?

Sellers are trying to exit the bond since they need money for other reasons or no longer have a positive outlook on gold. This is basic demand-supply that applies to everything the trades in the stock exchange and is visible more in case of thinly traded securities like bonds. If you are not willing to exit, you can ignore the current SGB price relative to gold since the government guarantees that you will get money back at the prevailing gold price on the maturity date. If you are looking to buy SGB, you can find good opportunities to purchase in such cases.

⬆️ Back to top

What happens on redemption date?

On redemption date, rupees will be sent to the bank account of the bond holder equal to units of SGB held times the redemption price. The redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited. There is no TDS. There is no capital gains tax if held to maturity. The last interest payment is included in the redemption amount.

⬆️ Back to top

What happens when a SGB bond-holder dies?

The nominee of the SGB holder must approach the respective Receiving Office (Scheduled Commercial Banks excluding RRBs, SHCIL, designated Post Offices and exchanges like NSE/BSE) with their claim. In the absence of nomination, the SGB holding becomes a part of the estate and is dealt with like all other assets.

⬆️ Back to top

What is the minimum and maximum limits in investing in SGB?

SGB is issued and traded in units equivalent to 1 gram of gold. The minimum and maximum limits are applicable as:

  • 1gm to 4Kg for individuals and HUF
  • for joint holders, the limit is applicable to the first holder
  • the limit includes primary issuances and trades via secondary markets
  • the limit is enforced on the basis of the financial year i.e. 1st Apr to 31st Mar At a gold price of ₹5000/gm, these limits are ₹5000 to ₹2 crore per financial year
⬆️ Back to top

When does the SGB start trading in the stock exchange?

SGB starts trading on stock exchanges within a fortnight of issuance on a date notified by the RBI.

⬆️ Back to top

When will the next SGB tranche come?

Unless a date is declared by RBI or the Finance ministry, we can only speculate which is not of any value. If needed, you can consider buying existing SGB from the stock exchange. You can click this link to check the latest news on this topic of next SGB issuance dates.

⬆️ Back to top

Where do I get the latest value of my SGB?

SGB trades in the stock exchange but that price is very different from the underlying gold price. There is some amount of complexity in valuing the SGB since there is the interest component as well. If you are holding to maturity, just use the current price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited. If you are planning to sell, then the latest price of SGB currently trading in NSE will give you an idea of the price you can sell it at.

⬆️ Back to top

Which gives higher return SGB vs gold ETF or MF?

Gold ETF and MF have tracking error due to storage costs, fund expenses and other costs. Their price is expected to lag that of gold. SGB being a pure digital instrument with 2.5% interest and guaranteed return as per gold price, gives a return slightly higher than gold price and hence gold ETF/MF.

⬆️ Back to top

Who can invest in SGB?

Indian residents like individuals (including minors under a guardian), HUF, trusts, universities and charities can invest in SGB. NRIs cannot invest in SGB. Residents who have become NRI may continue holding existing SGB until maturity or may exit via secondary market. Fresh investments in SGB is not allowed for NRI.

⬆️ Back to top

Who should invest in SGB?

SGB is well suited if

  • you need to purchase physical gold at the time of maturity
  • you get a decent discount to the current gold price while purchasing SGB in the secondary market via the stock exchange
  • your portfolio allocation to gold is high enough that you are not affected by the 5-year lock-in when rebalancing
⬆️ Back to top

Why is SGB issued?

SGB issuance aims to reduce gold imports since the SGB is not backed by physical gold. Instead, the government gives two guarantees on SGB: payment of 2.5% interest and returning money as per the prevailing gold price at maturity. However, as evident from the description, the principal is not protected since gold prices can fall below the value at the time of issuance.

⬆️ Back to top

Will I get interest if I buy SGB from secondary market?

Yes you will on the next coupon payment date. The interest, which is taxable, is equal to 1.25% of the issue price and again thereafter every 6 months. SGB price includes the accrued interest from the last coupon payment date to the trade date when you buy.

⬆️ Back to top

Goal-based investing
X

Click here to create your own investing plan.