Having Physical Gold locked up in your SAFE or Locker earning no income..? Then this is a wakeup call for you..! The Reserve Bank of India has come up with a unique style of investing in gold, where you can not only earn from Capital Appreciation but also earn a regular income (in form of interest) on your investment.
We as Indians always have a fascination towards Gold holding as can be established from the fact that India was once called a Golden Bird. Historically, we had only one option of investing and storing value in Gold by investing in Gold Bars, Jewelry or Gold Coins. All these options involve physical possession of the asset and further, they do not yield any income except capital appreciation. But government started an initiative to lure the investors looking for investment in gold towards a non-physical form of gold investment, i.e.SOVEREIGN GOLD BONDS whose first issue was made in October, 2015 which was welcomed by Indians. Since then, there have been numerous Sovereign Gold Bond Issues with the latest one being July, 2020 Sovereign Gold Bond Issue.
As an investor, we now have different avenues available to invest in Gold so as to gain from price appreciation in Gold in times of Financial Instability (approximately 20% appreciation in Year 2019 and a staggering 20% return in first 6 months of 2020).
Through this article, you may will get to know the pros and cons of investing in Physical Gold vs Sovereign Gold Bonds so that you can make an informed decision towards your investment.
What is Sovereign Gold Bond?
SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.(1)
Analysis from Point of View of Investor:
As an investor, we always try to go for an opportunity which yields a regular income as well as capital appreciation over a period of time. So, SOVEREIGN GOLD BONDS are a perfect fit for your investment yield.
Problems associated with physical Gold investment:
• Storage Costs Involved: Physical Gold involves Storage Cost as they must be placed in a secure place to avoid any theft.
• Zero yield: The investment yield is Zero except for capital appreciation, i.e. the investor does not get any interest or dividend on his investment.
• GST at time of purchase: The investor has to incur an additional cost of 3%as GST at the time of making investment which is dead cost to him.
• Purity concerns: In case of jewelry, the most important concern is the purity level of gold. It may range from 18 carat to 23 carat purity which the investor has to keep in mind. Further, authenticity of seller is needed to be evaluated to avoid any risk.
• Making Charges: Both, Gold Coins and jewelry have high making charges which makes them an unviable investment opportunity.
• Low liquidity/Lack of developed market: In absence of a well-developed market for physical gold, there may be a discrimination and rigged prices in the market which may lead to loss to the investor.
• Income tax applicability: On sale of Gold investment, the investor shall be required to pay Long Term Capital Gains tax as per the provisions of Income Tax Act, 1961.
Benefits of Sovereign Gold Bond:
• No Storage Costs: Sovereign Gold Bond have no Storage Cost as they are held in dematerialized form.
• 2.50% yield: Investment in Sovereign Gold Bond yields a fixed rate of 2.50% over and above capital appreciation over the period of time
• No GST at time of purchase: The investor does not have to incur an additional cost of 3% as GST at the time of making investment.
• Central Bank Backed Asset: Authenticity is proved since RBI is the issuer.
• Elimination of purity concerns: Investment is equivalent to Pure Gold and it will be redeemed at a price of pure gold prevailing at the time of redemption.
• Well-developed market: Since these Gold Bonds are traded on stock exchange, there is a well-developed market for their trading and hence, are liquid investment.
• Discount at the time of issue: Generally, these bonds are issued at a discount to the prevailing market price to make it lucrative to the investor.
• Exemption from Capital Gains Tax: The capital gains tax arising on redemption of SGB to an individual has been exempted.
Need of Central Bank to offer such Bonds
The Government, in association with RBI has come up with this scheme of Sovereign Gold Bond in order to curb the investment in Physical Gold and to further curb the imports of Physical Goldinto India which had dual loss of outflow of Foreign Exchange and money being blocked in gold which has no yield to the investor as well as the business.
As per a report of World Gold Council(WGC), as in 2019, Indian Households have approximately 25,000 tonnes of the yellow metal, thereby retaining the tag of the world's largest holders of the metal, which counts for approximately 40% of GDP of India. (2)
Huge amount of investment locked in the chests of Indian Households has been a cause of concern for the government since many years and this idea of introducing Sovereign Gold Bonds may help the government in addressing this concern.
Who is eligible to invest in the SGBs?
Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions, including a minor through his/her Guardian.
Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities per year.
Maturity of Sovereign Gold Bond
The maturity of these Gold Bonds is fixed at Eight Years with an option to exit from 5th Year onwards. These bonds can also be rendered as a collateral for obtaining Loan from the financing company just like Physical Bond.
Conclusion: If an investor is looking for an opportunity to invest in Gold in India, then one is advised to invest in the Sovereign Gold Bonds issued by RBI from time to time in different tranches. Among many other benefits, major benefits are 2.50% yield on investment, security of investment backed by the Reserve Bank of India and hassle free investment with high liquidity in the market.
The author of this article is CA Gaurav Goel (All India Rank 17 | Chartered Accountant)
(1) Source: www.rbi.org.in
(2) Source: www.businesstoday.in
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