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Sovereign Gold Bond Scheme 2021-22 Series VI Opens Today: Should You Invest?

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The Sovereign Gold Bond Scheme 2021-22 - Series VI opens today for subscription and will be in effect till September 03, 2021. According to the press release of the Reserve Bank of India (RBI) "The nominal value of the bond based on the simple average closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three business days of the week preceding the subscription period, i.e. August 25, August 26 and August 27, 2021 works out to Rs 4,732/- (Rupees Four thousand seven hundred and thirty-two only) per gram of gold."

 

What are Sovereign Gold Bonds and who can invest in it?

What are Sovereign Gold Bonds and who can invest in it?

Sovereign Gold Bonds (SGBs) are gold-backed bonds that act as a substitute for holding physical gold. This means that they are devoid of concerns like making charges and purity, which can occur when gold is used in jewellery. The issuance price must be paid in cash, and the bonds can be redeemed in cash at maturity, based on the prevailing or ongoing gold value at the time of redemption which is undoubtedly assured. The bond is offered by the Reserve Bank of India on behalf of the Government of India.

The bonds are stored in the demat form by RBI, which minimizes the possibility of theft or loss and makes them a better option to owning gold in physical form. To invest in SGBs the eligible investors are HUFs, trusts, universities and charitable institutions, joint holders, on behalf of minors made by his/her guardian. An investor can get the application form from the issuing banks/SHCIL offices/designated Post Offices/agents or else he/she can also download the form from the official website of RBI. In the application form, the investor must specify all the required Know-Your-Customer (KYC) details including PAN number.

Minimum and maximum limit for investment
 

Minimum and maximum limit for investment

To the eligible investors upon effective application procedure, the bonds are issued in one-gram gold denominations and multiples thereof by RBI. The minimum investment in the SGB is one gramme, with a maximum subscription limit of four kilogrammes for individuals, four kilogrammes for Hindu Undivided Families (HUF), and twenty kilogrammes for trusts and similar entities as defined by the government of India. These restrictions only apply to the primary or first individual in case of joint ownership. Banks and other financial institutions will be exempt from the investment ceiling since they maintain collateral. If a family member meets the eligibility requirements, he or she can purchase the bonds on behalf of his or her own name, and an investor or trust can purchase 4 kg/20 kg of gold per year since the threshold is set on a financial year from April to March basis. Bonds can be purchased directly or via agents from Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL), and regulated stock exchanges. For investing in the Sovereign Gold Bonds, cash up to Rs 20000 can be invested through cheques/demand draft/electronic fund transfer.

Interest rate and taxation

Interest rate and taxation

On the basis of the initial investment, the bonds will offer 2.50 percent interest per annum. The final accrued interest along with the principal at maturity will be credited in the bank account of the investor on a semi-annual or half-yearly basis. The interest earned on the bonds will be taxable in the hand of the investor under the Income Tax Act of 1961. The most appealing tax benefit of investing in SGBs is one will not have to pay capital gain tax if the issued bonds are kept till the maturity period which means that maturity proceeds at the time of redemption are completely free from capital gain tax. As a result, SGB is a better long-term investment than physical gold for long-term investors who seek to diversify their portfolio with gold as an asset allocation apart from equity.

Redemption and other options

Redemption and other options

The issued bonds can be redeemed in Indian Rupees upon maturity, with the redemption price based on a simple average of the closing price of gold of 999 purity reported by the India Bullion and Jewelers Association Limited over the preceding three working days from the date of repayment. The issued bonds can be redeemed in Indian Rupees upon maturity, with the redemption price based on a simple average of the closing price of gold of 999 purity reported by the India Bullion and Jewelers Association Limited over the preceding three working days from the date of repayment.

Despite the bond's 8-year maturity period, early encashment/redemption is permitted on coupon payment day after the fifth year from the date of issue. The bond can also be gifted/transferred to anybody who meets the eligibility requirements. The bonds can also be used as collateral against loans from banks, financial institutions, and non-banking financial companies (NBFC). The Loan to Value Ratio would be the same as that stipulated by RBI for regular gold loans. Investors can visit the appropriate bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date if they want to redeem their coupons prematurely. Only if the investor visits the appropriate bank/post office at least one day before the coupon payment date, he or she can submit an application for premature redemption.

What’s on offer?

What’s on offer?

According to the press release of RBI issued on 27th August 2021 "Government of India, in consultation with the Reserve Bank of India, has decided to offer a discount of Rs 50/- per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode. For such investors, the issue price of Gold Bond will be Rs 4,682/- (Rupees Four thousand six hundred and eighty-two only) per gram of gold." On the other hand, the country's largest lender State Bank of India (SBI) is also offering amazing offers to its customers going to invest in SGBs. The bank has outlined 6 reasons to invest in SGBs which are assured returns of 2.50% p.a. payable half-yearly, no capital gain tax on redemption, can be used as collaterals for loans, secure no storage hassles like physical gold, liquidity tradable on stock exchanges, and no GST or making charges unlike in physical gold. SBI is also offering a special discount of Rs50/gm on applying online.

Our take

Our take

If you want to earn higher long-term returns while also saving money on taxes, gold bonds can be a better option than other long-term debt investments such as fixed deposits. By keeping market volatility in mind investors who do not have liquidity issues can invest in gold bonds to seek risk-adjusted returns based on the prevailing market or performance of gold. Because SGBs have no expenses involved with their making, storage, or GST, they are the more convenient option to invest in gold than physical gold. SGBs are a must-have in your portfolio due to their guaranteed interest income of 2.5 percent per year, safety, indexation or tax benefit, the option to trade on stock exchanges, and other perks discussed above.

Read more about: sgb gold investment
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