Is it wise to buy Sovereign Gold Bonds from secondary market? Critical points explained

Purchasing gold on Dhanteras has evolved into a cherished tradition. For investors seeking to participate in this practice, the government’s Sovereign Gold Bonds (SGB) scheme, introduced in 2015, offers a more contemporary and convenient alternative to acquiring physical gold.

SGBs bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

As we gear up to celebrate Dhanteras tomorrow, Abhijit Roy, CEO, GoldenPi, an online platform for bonds, debentures and other fixed-income assets, explains important points related to SGBs for investors in an email interaction with FE Money. Read below

What are the places where investors can buy SGBs during Dhanteras?

Many commercial banks in India offer SGBs to their customers including State Bank of India (SBI), HDFC Bank, ICICI Bank, and others. SGBs can also be acquired via specific post offices that the government has approved. The opportunity to invest in SGBs is also offered by a lot of websites and online platforms.

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How to buy SGB from secondary market?

To operate in the secondary market, investors will need to create a Demat account to subscribe to these bonds during the subscription period. SGBs are sold and bought on exchanges like the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) where one can track the bond prices and where orders can be placed through a broker. Before placing an order, it is advisable to research the prevailing market prices and conditions since rates heavily depend on market demands.

Is it wise to buy SGB from secondary market?

There are two important factors to take into account as an investor when buying SGBs from the secondary market. First, restricted liquidity may provide difficulties if your goal is to purchase a significant amount of SGBs in a single trade. This indicates that, given the dearth of sellers in the market, purchasing in bulk might raise bond prices considerably. SGBs’ secondary market frequently sees low trading volumes, with few bonds actively exchanged in certain series and many remaining unseen.

What are the consequences (benefits or disadvantages) of buying SGB from secondary market?

To reduce the risk of price volatility brought on by imbalances in supply and demand, it is advised that you proceed cautiously and accumulate your SGBs gradually over time. In case you ever need to sell your SGBs before their maturity date, be prepared for the possibility that you might sell them at a price lower than their face value if there’s limited trading interest. Holding your SGBs until maturity minimizes the risk of selling them prematurely at a loss, ensuring you receive the full redemption amount as promised and avoiding potential market fluctuations that might affect your returns if you sell earlier.

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What are the tax implications of buying SGBs from secondary market?

Participating in the SGB program offers flexibility to investors. You can buy SGB in the secondary market and enjoy 100% exemption on capital gains if you hold it until maturity in the 8th year. Alternatively, you can sell the SGB at any point in time, without the obligation to wait for 5 years.

If you sell within 3 years, Short-Term Capital Gains (STCG) will apply as per your tax slab. If you sell beyond 3 years but within 8 years, Long-Term Capital Gains (LTCG) at a rate of 20% will be applicable. However, if you let the bond mature in the 8th year, you’ll benefit from 100% capital gains exemption.”

It’s critical to note, though, that SGBs aren’t meant to be traded; instead, they should be held until they mature. Selling them before they mature should only be taken into account in extreme cases. The sale would be liable to short-term capital gains tax at your applicable income tax slab rate if the holding period was less than a year.

Disclaimer: Views expressed above are those of the respective expert/commentator. Please consult your financial advisor before making any investment decision.