Sovereign Gold Bonds or SGBs are bonds issued by the Reserve Bank of India on behalf of the central government. These bonds are backed by physical and are an important source of revenue for the government. The RBI issues these bonds in tranches throughout the year and the last tranche is currently open for subscription, with the last date being 23 December 2022.
These SGBs are one of the ways in which investors can invest in yellow metal. However, there are several benefits of these SGBs which make them a much better option than other ways of investing in gold. Here are 5 of the best advantages.
SGBs are essentially bonds, meaning it’s a debt security and the government is liable to pay interest on it. Therefore, apart from the capital appreciation that one may enjoy as gold rates go up, investors also get a fixed 2.5% interest per annum (credited semi-annually) which further adds to the appeal of SGBs as no other option offers a fixed return on money which is essentially invested in gold.
No Default Risk
As these bonds are backed by the sovereign guarantee of the government of India, therefore the risk of default is almost negligible. In theory, countries can default on their interest obligations, the recent example being Sri Lanka, but India, being the 5th largest economy in the world, is no way close to a risk of default.
Exemption on Capital Gain Tax
If you buy gold in physical or even in digital form, you are liable to pay a tax on any capital gain arising out of the liquidation of the asset. However, in the case of SGBs, there is no capital gain tax to be paid, in case the price of gold goes up by the time of maturity (8 years). One thing to note here is, a premature exit (the government gives the option to exit after 5 years) would attract a capital gain tax. Also, interest received on SGBs is taxable.
Collateral for Loan
Although physical gold can also be collateralized for a loan, some problems come when it is in the form of ETF or digital gold. In the case of SGBs, financial institutions can easily lend you a loan against SGBs which is another advantage if investors need cash but at the same time do not want to liquidate their gold investment.
No Storage Cost/Theft Risk
Not having gold in the physical form itself saves from the hassle of having to store it in a safe place. This generally comes with some associated costs, such as a bank locker. Also, the risk of theft always persists. SGBs being in the Demat form, do not require storage space/cost and the risk of theft is not there. It sits into your Demat account just like any other security such as shares.
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