Sovereign Gold Bond (SGB) Scheme Calculator, Benefits, Interest Rate (2024)

Gold is one of the most popular and reliable investment options in India. However, buying and storing physical gold can be costly, risky, and inconvenient. That’s why the Government of India launched the Sovereign Gold Bond (SGB) scheme in 2015, which offers a unique and attractive way to invest in gold without holding it in a physical form.

In this article, we will explain what SGBs are, how to invest in them, what are the benefits and drawbacks of investing in them, how they are taxed, and how they compare with other gold investment options such as gold mutual funds and gold ETFs.

Consider reading: Sovereign Gold Bond Calculator

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are government securities denominated in grams of gold. They are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are substitutes for holding physical gold, as investors pay the issue price in cash and receive the redemption value in cash on maturity.

The Sovereign Gold Bonds have a fixed tenure of eight years, with an exit option available after the fifth year on the interest payment dates. The bonds also pay a fixed interest rate of 2.5% per annum on the nominal value, payable semi-annually. The bonds are tradable on stock exchanges and can also be used as collateral for loans.

How to invest in Sovereign Gold Bonds?

Investors can buy SGBs from designated banks, post offices, stock exchanges, and other authorized agents. The bonds are issued in multiple tranches throughout the year, and the issue price is linked to the prevailing market price of gold.

The minimum investment is one gram of gold, and the maximum limit is four kg for individuals, four kg for Hindu Undivided Families (HUFs), and 20 kg for trusts and similar entities per fiscal year. The investors need to provide their PAN number and other KYC documents to invest in SGBs. They can also apply online through their net banking accounts or mobile apps.

Benefits of investing in Sovereign Gold Bonds

SGBs offer several benefits to investors, such as:

Safety and security: SGBs are backed by the Government of India and eliminate the risks and costs of storing physical gold, such as theft, loss, purity, and making charges.
Regular income: SGBs provide a steady and assured income stream through the interest payments, irrespective of the fluctuations in the gold price.
Capital appreciation: SGBs also offer the potential for capital appreciation, as the redemption value is based on the prevailing market price of gold at the time of maturity or premature redemption.
Tax benefits: SGBs offer tax benefits to investors, such as no TDS on interest income, no capital gains tax on redemption for individuals, and indexation benefits for long-term capital gains on transfer.
Liquidity and flexibility: SGBs are tradable on stock exchanges, which provide liquidity and flexibility to investors. They can also be redeemed prematurely after the fifth year on the interest payment dates.

Drawbacks of investing in Sovereign Gold Bonds

SGBs also have some drawbacks, such as:

Limited liquidity: While SGBs are tradable on stock exchanges, they may not be as liquid as physical gold or other gold investment options. The demand and supply of SGBs may vary depending on the market conditions and investor preferences.
Long tenure: SGBs have a long tenure of eight years, which may not suit investors who prefer short-term or medium-term investments. The exit option is also limited to the interest payment dates after the fifth year.
Market risk: The price of SGBs is linked to the market price of gold, which is subject to fluctuations due to various factors, such as global and domestic demand and supply, geopolitical events, currency movements, inflation, etc. Therefore, investors may face some market risk, and the value of their investment may vary depending on the prevailing market conditions.

Taxes applicable on Sovereign Gold Bond

Investing in Sovereign Gold Bonds (SGBs) offers a unique opportunity to participate in the gold market without the need for physical ownership. However, it's essential to understand the tax treatments applied to the returns from SGBs, which are categorized into interest income and capital gains. Here's a simplified guide to navigate the tax obligations:

Interest Income

Taxability: The interest earned on SGBs is taxable under "Income from other sources" at the investor's applicable income tax slab rates. Notably, the interest is not subject to Tax Deducted at Source (TDS).
Action Required: Investors must include this interest income in their tax returns and pay any tax due accordingly.

Capital Gains

Capital gains tax is determined by the holding period of the SGBs and the conditions under which they are redeemed or sold.

Short-term Capital Gains (STCG): Gains from SGBs held for less than 36 months are taxed according to the investor's income tax slab rates.
Long-term Capital Gains (LTCG): For SGBs held over 36 months, gains are taxed at 20% with indexation benefits or 10% without indexation, whichever is lower.
Exemption on Redemption: Remarkably, capital gains on SGBs redeemed at maturity (after eight years) are tax-exempt for individual investors, encouraging long-term investment.

Key Highlights:

Indexation Benefit: This allows adjustment of the acquisition cost for inflation, potentially reducing the tax on LTCG.
Premature Redemption: Capital gains from SGBs redeemed before maturity (between the fifth and eighth year) are taxable based on the holding period and applicable tax rates.

Final Thoughts on Sovereign Gold Bond Scheme

As we can see, each of these options has its advantages and disadvantages, and investors should choose the one that best suits their financial goals, risk appetite, liquidity preferences, and tax implications. SGBs are a smart way to invest in gold for long-term investors who want safety, regular income, capital appreciation, and tax benefits.

Gold mutual funds are a convenient way to invest in gold for investors who want professional management, diversification, and flexibility. Gold ETFs are a cost-effective and transparent way to invest in gold for investors who want liquidity, purity, and market-linked returns.