Sovereign Gold Bond Scheme is now open: Here's all you need to know

For those who are looking to include gold in their portfolio, Sovereign Gold Bonds could be a good addition. The scheme is now open for subscription.

SGBs were introduced in 2015, as part of the gold monetization scheme. It is essentially a substitute to holding physical gold. SGBs are government securities which are denominated in grams of gold. So, each unit is equal to one gram of gold.

The Sovereign Gold Bond Scheme 2022-23 – Series IV, will be open for subscription from March 6th to March 10th. The issue price has been fixed at Rs 5,611 per gram of gold, which is over Rs 200 more than the December issue price, which was Rs 5,409. However, for investors who apply online and pay digitally, there is a discount of Rs 50 per gram. Post discount, the issue price would be Rs 5,561 per gram.

Here are some important points to keep in mind while investing in SGBs:

1. The minimum investment for the scheme is 1 gram while the maximum investment is 4 kgs for individuals per financial year.
2. The interest rates on SGBs is 2.5% per annum
3. Interest is credited on a semi-annual basis.
4. SGBs are sold through designated post offices, stock exchanges, as well as banks. They can also be purchased online at a discount of Rs 50 per gram.
5. The tenor of these gold bonds are 8 years, however, investors can make a premature redemption after the 5th year on the date when interest is payable.

There are a several benefits of investing in SGBs. Let’s take a look at some of them.

1. Interest rate of 2.5% per annum is over and above the benefit of a rise in gold prices.
2. Even if gold prices fall, investors get the 2.5% interest, which physical gold doesn’t give.
3. SGBs can be transferred, used as a collateral for loans and even traded on stock exchanges if they are in demat form.
4. SGBs are tax-free, unlike physical gold where GST is levied on purchasing.
5. On maturity, no capital gains tax is levied.
6. SGBs are guaranteed by the govt, hence the risks are very low.
7. SGB is like holding physical gold, without the hassle or risk of storage.

While there are a lot of benefits of investing in SGBs, there are some downsides too.

1. The long lock-in period of an SGB might be a deterrent for some investors.
2. If you redeem early, capital gains will be applicable.
3. There is always the risk of a fall in gold prices, but that is the case with physical gold as well.
4. The interest earned on SGBs is fully taxable.
5. Although SGBs are tradable on the exchanges (post 6 months of being issued), secondary market trading volumes are usually quite thin.

Experts recommend having atleast 5%-10% of allocation towards gold, as it provides a good hedge against inflation.

"SGBs are one of the best replacements for physical gold. It works best for individuals who are preparing for a future events like their children’s weddings. Along with the MTM price, one can also earn interest at 2.50% per annum on the initial investment. For those who choose to incorporate gold in the portfolio, one should keep in mind that it should not exceed more than 10% of the portfolios", says Feroze Azeez, Deputy CEO, Anand Rathi Wealth.