Sovereign Gold Bonds (SGBs) are government-backed securities that let you invest in gold digitally. They offer 2.5% annual interest, tax-free capital gains at maturity, and eliminate the need to store physical gold.
What Are sovereign gold bonds?
Sovereign gold bonds are government-issued securities that allow investors to own gold in digital form, without having to buy or store the physical metal. These bonds are denominated in grams of gold and are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
Each bond unit represents one gram of gold and earns a fixed annual interest of 2.5%, in addition to any capital appreciation linked to the market price of gold. The bonds are considered one of the safest and most tax-efficient ways to invest in gold.
How sovereign gold bonds work
When an investor buys SGBs, they pay the issue price (in rupees) determined by the average closing price of gold over the preceding three working days, as published by the India Bullion and Jewellers Association (IBJA).
The government then issues these gold bonds in tranches several times a year, and investors can buy them through banks, post offices, stock exchanges, or online platforms.
- Denomination: 1 gram of gold per unit
- Tenure: 8 years (with an exit option after 5 years)
- Interest Rate: 2.5% per annum (paid semi-annually)
- Redemption price: Based on gold prices at the time of maturity
At maturity, investors receive the market value of the gold in rupees, not physical gold.
Key benefits of SGBs
1. Guaranteed by the government: Backed by the sovereign guarantee of the Government of India, making it one of the safest gold investment options.
2. Fixed interest income: Investors earn 2.5% annual interest on the initial investment, credited semi-annually—a unique feature not available with physical gold or Gold ETFs.
3. Capital gains exemption: If held till maturity (eight years), capital gains are completely tax-free, making SGBs the most tax-efficient gold investment.
4. No storage or purity concerns: Being digital, SGBs eliminate the risk and cost of storing physical gold, as well as issues related to purity.
5. Can be used as collateral: SGBs can be pledged as security for loans from banks or financial institutions.
6. Liquidity options: Although primarily long-term instruments, SGBs can be traded on stock exchanges after a few weeks of issuance.
How to invest in Sovereign Gold Bonds
1. Check for RBI issue window: The RBI announces multiple SGB tranches each year. Dates are published on RBI and finance ministry websites.
2. Where to buy: Investors can buy through banks, designated post offices, Stock Holding Corporation of India (SHCIL), NSE, and BSE, or via net banking.
3. Investment limits: A minimum of 1 gram and maximum of 4 kg for individuals. Trusts can hold up to 20 kg in gold bonds.
4. Holding format: Can be held in demat form or as a certificate of holding issued by the Reserve Bank of India.
5. Redemption: Automatically redeemed after eight years, or can be exited from the fifth year onwards (interest stops accruing after redemption).
Taxation of Sovereign Gold Bonds
1. Interest Income: Taxable as per investor’s income tax slab.
2. Capital Gains: If held till maturity (eight years), entirely exempt from capital gains tax. If sold between 3-8 years, 20% LTCG. If sold in less than three years, STCG as per income tax slab.
This makes sovereign gold bonds the most tax-efficient gold instrument, especially for long-term investors.
Gold Bond Risks
1. Lock-in period: Funds are tied up for at least five years before early redemption is allowed.
2. Liquidity: While tradable, exchange volumes are often low, making exit difficult before maturity.
3. Price volatility: Returns are linked to gold prices, which can fluctuate based on global economic conditions and currency movements.
Despite these, the combination of fixed income, price appreciation, and tax exemption makes sovereign gold bonds a superior long-term gold investment option for conservative investors.