Why is Sovereign Gold Bond (SGB) considered the best investment in gold? Everything you need to know.

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Is sovereign gold bond (SGB) the best investment in gold? | Vrid
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Usually, financial instruments from the Government are considered to give lower returns, as they are safest, but this isn’t the case with SGB.

SGB gives better returns than other gold investments while being the safest gold instrument. How? Let’s find out.

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In our previous blogs, we discussed everything about digital gold, gold ETFs and mutual funds. In the end, we told you that sovereign gold bonds are best for investment in gold. And the good to better investment range looks like this –  

SGB > Gold ETF > Gold Mutual Fund > Digital Gold > Physical Gold

Our today’s focus will be on Sovereign Gold Bonds (SGB). 

What is the Sovereign Gold Bond (SGB)?

The RBI issues SGB on behalf of the Government of India in exchange for money, just like other bonds. They connect the bond price to the market price of the physical gold. 

Since it’s issued by the Government, we consider it to be the safest. You will lose money only if the gold prices go down or if the government defaults and the chances of the Government defaulting are low. 

How do SGB works?

RBI issues SGBs multiple times during the financial year. You can invest in them through your bank, post office, or broker. Investing through an online broker with Demat has additional benefits. Will talk about it in some time. 

The minimum initial investment is 1 gram of gold, and the upper limit is 4 kg of gold per investor (individual and HUF) per fiscal year (April to March).

These bonds have a maturity of 8 years. At the time of maturity, the bonds would be redeemed, and you would receive returns based on the market price of gold at that time. 

Though the tenor of the bond is 8 years, early redemption of the bond is allowed after the fifth year from the issue. You can also sell it on the stock exchange if bought through an online broker.

To make these bonds more attractive, the GOI has added some benefits.

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Benefits of SBG

1. Interest Income – Passive Income

You will receive 2.5% interest every year on the invested amount. They issued this interest on a half-yearly basis. So you will receive 1.25% interest every 6 months. 

This interest income works like passive income and increases your returns on investment. Taxes on interest income is based on your tax slab.  

2. Tax exemption 

Capital gains are tax exempted if you redeem the bonds at maturity with RBI. 

After 5th year, the RBI gives an option to redeem the bonds every 6 months. Few suggest that if you redeem it then with RBI your capital gains will be tax exempted. But we are not sure about it. Our mail to RBI for further clarification has received no response yet. Will keep you updated.

For now, if you hold the bonds till the 8th year, your capital gains will be tax-exempted. And if you redeem it before that you will have to pay capital gain tax. 

Short-term capital gains (less than 36 months) will be taxed based on your tax slab. Long-term capital gains (after 36 months) are taxed at 20% with an indexation benefit.

3. Online discount & liquidity

If you invested in SGBs online, you would receive a ₹50 discount per gold gram price. 

Also, when you invest through online brokers like Zerodha, your SGBs are stored in your Demat account. So you can sell them whenever you want after a specified period decided by RBI. You don’t have to wait till the 5th or 8th year. 

4. Collateral for loans

Most banks and NBFCs easily accept SGBs as collateral for loans, and the loan-to-value ratio is like that of physical gold. 

Now that you have understood the benefits of investing in SGB, let’s discuss the advantage it provides over physical gold, digital gold, gold mutual funds, and ETFs.

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Advantages of investing in SGB over physical gold

1. No making charges and GST

When you buy physical gold, you pay making charges between 1% to 20%. Some ornaments have higher making charges. You also have to pay a GST of 3%. 

With SGB, you don’t have to pay any making charges or GST.

2. Best gold purity

Finding out the purity of the gold is tough. Many people aren’t aware of the difference between 24, 22 and 18-carat gold. They don’t check for hallmark markings. 

You don’t have to worry about the purity of gold in SGB. 

3. No storage and theft risk

While investing in SGB, you don’t have to think about storage, fraud, theft, or having to pay extra for a locker.

4. No wealth & capital gain tax

If you own physical gold worth over ₹30 lakhs, you have to pay a wealth tax of 1%. Also, you would have to pay capital gains tax. 

If sold in the short term, before 36 months, your gains will be taxed based on your tax slab. For gold sold after 36 months, the long-term capital gains are taxed at 20% with an indexation benefit.

In SGB, you don’t have to pay any wealth tax, and your capital gains will be tax exempted if redeemed at maturity.

5. Passive Income

You receive an interest income of 2.5% every year. This works as a passive income stream.

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6. High ROI

As you don’t have to pay any making charges, GST, wealth or capital gain tax, your cost of owning gold is low. Low cost and interest income increase your returns on investment. 

SGB provides some more additional benefits over digital gold, gold ETFs and gold mutual funds like no storage fee, no management fees and others. You can read more about digital gold here and on gold ETFs and mutual funds here.

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Still Curious?

If you are like us, who likes to analyse a little more or check out content in different formats, well you are in luck. Below you can find some suitable content we found.

ET Money – Best Ways to Invest in Gold | Sovereign Gold Bond vs ETFs vs Mutual Fund vs Digital & Physical Gold

CA Rachana Ranade – How to buy Gold Bonds Online| What are the advantages of Gold Bonds

Cleartax – Sovereign Gold Bonds Schemes ( SGB )

Note: We don’t have any affiliation with them. We are sharing links only for educational purposes. The opinions expressed by them belong solely to them and do not reflect the views of Vrid.



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DISCLAIMER: This newsletter is strictly educational and is not an investment advice or a proposal to buy or sell any assets. Please be careful and do your own research.

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