Buying SGBs is a better alternative to holding physical gold
07-Apr-2023 •Research Desk
While it's true Indians love gold, we would never advise you to invest in gold. It is a pretty 'blah' investment option because they don't grow your wealth in the long run.
That said, if you are still sold on gold, we'd suggest investing in sovereign gold bonds (SGB) only. (Not gold mutual funds because they recently lost their indexation benefits). So, without wasting more time, let's deconstruct SGB for you.
What are SGBs exactly?
SGBs are issued by the RBI. They are a safer, reliable substitute to holding actual gold.
These bonds basically track the price of one gram of gold.
SGBs are issued in batches called 'tranches' on specific dates during the year.
These gold bonds usually have an eight-year maturity period. We'll explain the significance of this in a bit.
Do sovereign gold bonds provide decent returns?
SGB returns are dependent on the market price of gold at the time of liquidating your investment.
You will also receive a further 1.25 per cent interest every six months (2.50 per cent per annum) on the issue price first launched by the RBI, something physical gold and gold funds don't offer.
What's more, the gains you make on SGB are tax-free if held until maturity. But even if you don't, you'll receive indexation benefits, which means your post-tax returns will be higher than gold fund investments.
Where can I buy them?
You can purchase SGBs when the RBI (Reserve Bank of India) issues them. Banks and designated post offices are your go-to purchase points in this case.
Is there a better way to buy SGB?
You actually don't need to wait for the RBI to issue fresh SGBs.
You can simply buy them from the stock exchanges (BSE or NSE) whenever you wish.
All you need is a demat account.
Also, bear in mind that the maximum number of SGBs you can buy is equivalent to 4 kg of gold per fiscal year, irrespective of where you buy it from.
In case you are holding SGB jointly, this 4 kg limit will be applicable to the primary holder only.
I heard there are advantages to buying SGBs from the stock exchange. Is it true?
That's right. You can actually buy SGBs at a discount on the exchange.
For instance, the market price of one gram of 24-carat gold that cost Rs 6,062 on April 6, 2023, was available at a discounted price of Rs 5,605 (2028 Trache VI cost).
The cost at the exchange is lower because there are more sellers than buyers on the exchange.
Since I can buy SGBs at a discount on the stock exchange, it will benefit me in the long run, right?
Yes and no.
Remember we said SGBs have an eight-year maturity period? What it means is that if you try to sell your SGB investment before it matures, you'll have to sell them at a discounted price as well. Plus, you'll have to pay taxes!
On the other hand, if you wait until your SGB investment matures, you will receive the market price of gold, which is always higher than the price of SGB on the stock exchanges. You'll also get tax benefits. We'll explain this in the next frequently-asked question.
There are so many different tranches on the stock exchanges. Which one should I buy?
First and foremost is liquidity. Look at SGBs that have high liquidity. In simple words, look at SGBs that can be easily sold. Because if you can't do that, you'd be compelled to sell it at a big discount.
Second, ensure your buying price is lower than the issue price. (Issue price is the price at which the RBI had originally launched the SGB tranche).
How is my SGB investment taxed?
If you sell SGB within one year (in the secondary market)
The gains you make will be added to your annual income and then taxed as per your income tax slab.
If you sell SGB after one year (in the secondary market)
Your gains will be taxed at 20 per cent. However, you'll receive indexation benefits, lowering your tax liability. (Indexation adjusts for inflation before calculating tax).
If you wait for SGB to mature...
If you can hold SGB until its maturity, you won't have to pay any tax!
The SGB pays me interest twice a year. Is that taxed?
Yes. It is added to your annual income and taxed as per your income tax slab.
Can my family claim these SGBs if something happens to me?
Is there anything else I should keep in mind?
Suggested watch: Should I buy an SGB from the stock exchange?