Sovereign Gold Bonds are financial instruments with underlying as gold and hence a gold investment form issued by the RBI on behalf of the government of India. One bond unit is equivalent to 1 gm and other than the offer made when it is open for subscription like as in the current time when SGB 2021-22 Tranche 4th is open, you also have an option to buy it from the secondary market just like a scrip.
Say for instance: CENTRAL GOVT SGB 16OT17 S3 2.5 (SGBT10) where SGBT10 is the quote for the security and it as per the latest data shows volume transaction at just 1 while the price quoted is Rs. 4729 per gm. The lifetime low and lifetime high for SGBs have been in the range of Rs. 2426-Rs. 5500. This security was listed on the NSE.
Important points in relation to buying SGBs via secondary market or stock exchanges
1. After the issue of SGB closes for public subscription, the units are to be listed on the stock exchanges within 15 days time.
2. This is sometimes a good way to buy SGBs from the capital market as you do not need to wait for the SGB subsctiption to open. But remember, here the liquidity is highly low as seen in the above example.
3. Price wise these SGBs listed on exchanges can provide a good entry point as the demand factor also decides their price. As it is in the current regime, some of the previous issues of SGB in the secondary market are commanding a lower price by almost 1-3 percent and this can go up with the uptick in demand for them.
When should one go for buying SGBs from stock exchanges?
Obviously if you as an investor class are able to get a better rate on the exchanges you should choose the capital market and this can be when the gold price falls below the issue price of SGBs. Note price on the stock exchange for SGBs are determined by the price of the underlying i.e. gold.
Another advantage buying SGB through exchange is that there is not a mandate to hold it for a lock in period of 5 years for redemption and can be exited as and when the chance is available.
Taxation of Gains on selling SGBs through exchange
Note investors also need to be mindful of the taxation aspect in case of SGBs which are sold on the exchanges as that would attract tax at the rate of 20% with indexation after a holding period of 3 years. And in a case they are sold off before the three year period then the income shall be added to the individual's income and taxed as per the person's tax slab.
These gold bonds can be a meaningful gold investment for long term investors who also want to earn 2.5% interest rate per annum.