Sovereign Gold Bonds First issue of FY24

The government has been raising money through the issue of sovereign gold bonds (SGBs) since 2016 and it has been fairly successful. These are bonds backed by gold and offers investors an opportunity to participate in gold as a financial security. Such SGBs can be either held in the form of a statement issued by the RBI or it can be held in the demat account. in short, the SGB gives all the benefits of holding gold without the hassles of handling physical gold.

Sovereign Gold Bonds – Series 1 (2023-24)

The issue of Sovereign Gold Bonds 2023-24 (Series I) will open for subscription Monday, June 19, 2023 and will close for subscription on Friday, June 23, 2023l. The settlement date will be June 27, 2023 and that will be the date of allotment of the sovereign gold bonds to the eligible investors. Normally, the pricing of the gold bond is done based on the average price of last 3 days as published by the IBJA. Accordingly, the issue price of the Sovereign Gold Bond – Series 1 (2023-24) had been fixed at Rs5,926 (Rupees Five Thousand Nine Hundred Twenty Six only) per gram of gold. All SGBs are held based on grams of gold.

It must be noted here that the government additional offers a special incentive of Rs50 per gram for digital applications made for the sovereign gold bonds. Thus, in case of retail investors making digital applications, the effective price would be Rs5,876 per gram.

Key terms and conditions of the SGB – Series 1 issue

Here are some of the major highlights of the SGB issue; the first for FY24.

• Sovereign gold bonds are issued in lieu of physical gold to reduce the demand for physical gold. This gold in grams is guaranteed by the government of India and hence the default risk in the bond is zero. However, there is price risk in the bond since the value of the Sovereign Gold Bond is linked to the price of gold.
   
• Investors can buy the sovereign gold bonds through Scheduled Commercial banks Payment Banks or Regional Rural Banks. SFBs cannot sell gold bonds. Additionally, the SGBs will also be sold through , Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), designated post offices, and recognised stock exchanges viz., NSE and BSE. Investors with internet banking accounts or online trading accounts can buy the SGBs online on the internet itself after basic KYC.
   
• Sovereign gold bonds can only be purchased by resident Indian individuals, trusts, universities, and charitable institutions. However, NRIs and foreign nationals are not eligible to invest in sovereign gold bonds. SGBs are denominated in the basic unit of 1 gram of gold. Individuals can buy minimum of 1 gram and maximum of 4 KG in a year. In case of joint holdings, this limit will be applied to the primary holder. In case of multiple family members, the limit goes up proportionately. Trusts can buy up to 20 KG equivalent of gold bonds.
   
• Sovereign gold bonds will have a basic tenor of 8 years from the date of allotment. However, the bonds are listed after 6 months of the issue, so secondary market liquidity is technically available. In addition, the RBI offers the option of premature redemption after 5th year.
   
• For the purchase of SGBs, cash payment is only accepted up to Rs20,000. For anything beyond that, the payment has to be made necessarily by cheque, demand draft or through online banking transactions with an audit trail. SGBs will be issued as Government of India Stock under Government Securities Act, 2006. The investors will be issued a Certificate of Holding for the same. The investors can also opt to get the bonds in demat format or the SGBs are also eligible for conversion into demat form later.
   
• A very important aspect that makes the sovereign gold bonds attractive is the interest payment, which is also guaranteed by the government of India. Interest is payable at the rate of 2.5% per annum, but such interest would be disbursed to the investors twice a year. It must be noted here that the interest earned as above is treated as other income of the investors and taxed at the applicable marginal rate of tax to the investor. Even though SGBs may not be liquid in the secondary market, they can be offered as collateral for loans based on the LTV (loan to value) ratio mandated by RBI from time to time. The LTV ranges between 75% and 85%.
   
• Basic KYC is mandatory for purchase of gold bonds. In fact, the Know-your-customer (KYC) norms are the same as that needed for purchase of physical gold. KYC documents like Voter ID, Aadhaar card/PAN or TAN /Passport will be required. PAN Number linked to Aadhar is mandatory for every SGB application.

How are capital gains on SGBs taxed?

That is an important aspect. As stated earlier, the interest of 2.5% is fully taxable in the hands of the investor at the extant rates. However, there will be no TDS deduction. Here we focus on the capital gains aspect of sovereign gold bonds (SGBs). Let us look at different scenarios for the calculation of capital gains.

1. Let us first assume a scenario when the sovereign gold bonds are sold in the secondary markets before 3 years. Liquidity may be an issue, but we leave that aside for now. Since SGBs are non-equity holdings, they have to be held for 3 years to qualify as LTCG. If sold in the secondary market before 3 years, it will be treated as short term capital gains and taxed at the peak rate applicable. In addition, STT would also be applicable.
    
2. If the investor uses the 5-year special window offered by the RBI, then any gains on redemption will be treated as long term capital gains. They will be taxed at a concessional rate of 20% with the benefit of indexation, which would typically reduce the effective rate to below 10%.
    
3. If the investor holds for the full 8 years term and redeems after that, then the entire capital gains, irrespective of the amount, is entirely tax-free in the hands of the investors. This is the most attractive aspect of the SGB.
    
4. Finally, if there are long term losses, the same can be adjusted against long term gains under other heads of capital gains.

Today, investors are looking as a hedge to their portfolio and SGBs offer the right way to do it.