Experts recommend that Sovereign Gold Bonds (SGBs) are the most advantageous method to invest in gold due to the added benefit of a 2.5% annual interest rate and exemption from capital gains tax.
The government has recently launched the first series of SGBs for the fiscal year 2023-24. The subscription period for Series I will be from June 19th to June 23rd, 2023, with the issuance date set for June 27th. SGBs are issued by the Reserve Bank of India (RBI) on behalf of the government as an alternative to purchasing physical gold. In collaboration with the RBI, the Indian government has decided to offer a discount of Rs 50 per gram on the nominal value for investors who apply online and make digital payments. For such investors, the issue price of a gold bond will be Rs 5,876 per gram.
SGBs can be purchased through scheduled commercial banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognized stock exchanges such as the National Stock Exchange of India Limited and Bombay Stock Exchange Limited. It is important to note that SGBs are restricted for sale to resident individuals, HUFs (Hindu Undivided Families), trusts, universities, and charitable institutions.
The minimum investment allowed is one gram of gold, while the maximum subscription limit is 4 Kg for individuals, 4 Kg for HUFs, and 20 Kg for trusts and similar entities per fiscal year (April-March), as specified by the government. Payment for SGBs can be made in cash up to a maximum of Rs 20,000. Other acceptable modes of payment include demand drafts, cheques, or electronic banking. The tenor of the SGB is eight years, with an option for premature redemption after the fifth year. Investors will receive a fixed rate of 2.5% per annum, payable semi-annually on the nominal value.
Should we invest?
SGBs have several advantages over other forms of gold investment. One key benefit is the additional interest of 2.5% that investors receive. Another advantage is the absence of capital gains tax and management expenses. Furthermore, SGBs are issued by the RBI on behalf of the Government of India, making them a secure investment option.
According to a research report from ICICI Direct, the recent correction in gold prices presents an investment opportunity. After reaching all-time high levels in May 2023, gold prices have experienced a 5% correction. Currently, gold prices are trading below Rs 59,000 per 10 grams on the MCX exchange, down from around Rs 62,000. Given the positive outlook for gold prices, this correction is viewed as a favorable entry point for long-term allocation.
Globally, interest rates are nearing their peak levels, and the US Federal Reserve is expected to begin reducing interest rates by the end of the year. Historically, a decline in interest rates has had a positive correlation with gold prices, as it reduces the opportunity cost of holding gold. Furthermore, the recent Union Budget has made investing in gold through gold ETFs/funds less attractive. These instruments will no longer enjoy the benefits of long-term capital gains tax and indexation, and will be taxed at the marginal tax rate starting from April 1, 2023. As a result, investment in SGBs has become more appealing compared to other investment modes.
According to the report, “SGBs remain the preferred method for investing in gold due to the additional 2.5% annual interest and exemption from capital gains tax. There are no recurring expenses, and any capital gains from redeeming the sovereign gold bond scheme are tax-exempt. If these bonds are sold in the secondary market before maturity, capital gains will be subject to a 20% tax rate with indexation if sold after three years, or the marginal tax rate if sold before three years.” The popularity of SGBs has increased significantly in recent years, thanks to their ease of investment and the additional interest they offer.
The report states, “Investors who apply online and make digital payments will receive a discount of Rs 50 per gram. They will also earn an additional interest rate of 2.50% per annum on the nominal amount deposited, while still maintaining full exposure to gold prices.”
