If you wish to buy gold as an investment and not for consumption, the latest tranche of the Sovereign Gold Bond can be your go-to option.
The world has been going through an extraordinary crisis over the last few weeks and it looks like we’re still at least a few months away from returning to normalcy. The COVID-19 pandemic has destabilized the markets across the globe and India is not immune from its adverse effects. Years’ worth of investment profits have been wiped off, job-losses and pay-cuts are surging and a recession looks unavoidable. But amid the widespread negativity, one investment avenue that has looked promising is gold. The prices of the coveted yellow metal have increased by 30% over the last year after staying muted for years owing to the economic uncertainty and slowdown the world has seen since the beginning of 2019. So, the current situation is a good time to slightly increase your gold investments in a bid to diversify and fortify your investment portfolio to better tackle the overall economic uncertainty. And what better occasion to invest in gold than the auspicious festival of Akshay Tritiya?
Now buying physical gold in the form of gold coins and jewelry has been the most popular and traditional exercise during this festival due to its symbolic significance. However, due to the ongoing lockdown, visiting a jewelry shop is out of the question. But if you want to purchase gold purely for consumption-oriented reasons, you can do so online. Numerous jewelers and even e-commerce portals are extending this facility wherein buyers can buy gold ornaments and coins on their websites and mobile applications, and collect them from their stores or get them delivered after the lockdown. And if you’re looking to buy gold from an investment perspective, you have a few digital options: purchasing physical gold online, gold mutual funds, gold exchange-traded funds, and the Sovereign Gold Bonds. Among these, SGBs have a few advantages over the other options.
What are Sovereign Gold Bonds?
Before I discuss the advantages of investing in SGBs, let me first explain what is it and how it works. Sovereign Gold Bonds are government securities denominated in grams of gold issued by the Reserve Bank of India on a periodical basis. Investors can buy these bonds after paying the issue price and redeem them at the market gold price at that time. The bonds bear an interest rate of 2.5% p.a. which is credited to the investor’s account on a semi-annual basis and the last interest is payable on maturity along with the principal. The SGBs are sold through nationalized banks, scheduled private and foreign banks, designated post offices, Stock Hold Corporation of India Ltd. (SHCIL), and authorized stock exchanges either directly or through their agents. These are held in the books of the RBI or in de-mat form. Eligible individual subscribers and HUFs can invest in SGBs from one gram to four kilograms of gold.
This investment threshold is higher for trusts, universities, etc. and subscribers can also invest in the name of their minor children. SGBs come with a tenure of eight years, however, encashment of the bonds is allowed after the fifth year from the date of issuance. These bonds can also be traded on exchanges or transferred to other eligible investors if held in the de-mat form. The interest on bonds is taxable according to the provisions of the I-T Act; however, the capital gains tax on redemption of SGBs by individuals has been exempted while indexation benefit is provided to LTCG arising to any person on transfer of bonds.
In fact, the RBI opened the Series I of SGB subscriptions for FY20-21 on April 20 which will continue until April 24, 2020, at Rs. 4,639 per gram with a Rs. 50 discount on each gram purchased online. If you miss this deadline, you can still purchase SGBs in secondary markets.
Advantages of investing in SGBs
No purity and storage concerns: The biggest advantage of investing in SGBs over any physical form of gold is that the former is free of any purity and storage concerns. Buying gold ornaments and coins involves the risk of impurities apart from additional costs in the form of making charges and GST on making charges which eat into the returns at the time of selling them. There’s no such worry when buying SGBs. Equally significant is the fact that physical gold always comes with the risk of being lost or stolen while storing them in a bank locker involves additional charges. SGBs are free of such concerns as these are stored in a dematerialized form.
Higher returns: SGBs attract a 2.5% interest during the holding period which the subscribers earn over and above the appreciated price of the yellow metal making its returns higher than the actual return on gold. While making charges and taxes diminish the returns on physical gold, redeeming gold ETFs could result in lower actual returns since that is determined on the price of gold on the trading exchange on the day of sale.
Can be used as loan collateral: Just like physical gold, even SGBs could work as collateral for a loan from a bank, FI, or NBFC, unlike a Gold ETF investment.
More tax-efficient: Physical gold or Gold ETFs attract an LTCG of 20.8% (including cess) with indexation benefits when the holding period is over 3 years, while STCG is added to your gross income and taxed according to applicable slab rate. Now interest on SGBs is taxed according to the provisions of the I-T Act but the capital gains tax upon redemption is tax-free.
If you’re someone who invests in gold every Akshay Tritiya, you might be tempted to go for SGBs this time around for the reasons discussed above. More so because gold has been seen as a hedge against market volatility and economic uncertainties, and the current difficult scenario seems to be an opportune moment. Gold investments can also play a crucial role in rebalancing and diversifying your portfolio if it’s skewed towards a particular asset class. However, even if you plan to invest in gold, you’ll be well-advised not to get carried away and limit your gold investments to 10% of your entire portfolio’s value. Simply because gold prices seem to flat-tine for long periods of time and a portfolio consisting of excessive proportion of gold investments may not be sufficient to fulfill your financial goals in time. That said, you can consider investing in SGBs for capital protection and appreciation eliminating purity and safety worries if buying physical gold is not a symbolic compulsion.
(The writer is CEO, BankBazaar.com)