Sovereign Gold Bond's are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
If you purchase gold jewellery, you end up worrying about its safekeeping. You may even have to pay for storage in a bank locker. With this type of bond, the risks and costs of storage are eliminated.
The RBI issues these bonds on behalf of the government. Which also means that the Central government backs the scheme. That makes these bonds safer than purchasing actual gold.
When you withdraw your bond, either upon maturity or prematurely, you get the current market price. Investors are assured of the market value of gold at the time of maturity and periodical interest, says the RBI.
When you buy gold jewellery, you pay making charges that you may not be able to redeem upon resale. But with SGB, you need not worry about the making charges or the purity of the gold.
The government of India has exempted the tax on capital gains for purchase of gold if you invest in a sovereign gold bond. Interests earned, however, will be taxable.
If you try to transfer (exit) the bond before maturity, you can use indexation to lower the capital gain tax burden.
The paper gold bonds can double as collateral. You can use sovereign gold bonds as collateral to receive loans from banks like you take out a gold loan.
The price of gold is fixed and regulated by the IBJA (Indian Bullion and Jewellers Association) and is usually the same for all. But, when you purchase physical gold, you also pay a high cost of craftsmanship, over and above the gold price. There is no craftsmanship element when you choose a sovereign gold bond. Thus, the total price at which you buy an SGB is lower than physical gold ornaments.
When you purchase physical gold, you only earn when the gold appreciates. Such in not the case with an SGB. Here, you earn through two components – one being the appreciation of gold itself, and the second is the interest rate you receive on SGBs. On Maturity, you receive tax-free appreciated gold money along with non-cumulative interest earned over the years. Only the non-cumulative interest component is taxable.
It is no secret that storing your gold safely is entirely your responsibility. Individuals pay for lockers or private safes at various financial institutions. Since an SGB is a paper document, you don’t have to worry about storing it in a safe place. In fact, if you misplace your SGB documents, you can simply reach out to RBI and request a copy.
Since RBI issues SGBs on behalf of the Government of India, they come with a sovereign guarantee on payment of interests and principal repayment. Simply put, the Government assures that you will get your dues back without delay on maturity. The sovereign guarantee makes an SGB one of the safest ways to invest in gold.