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Investment Guide

What is Gold Bond Investment?

What is Gold Bond Investment?

It’s not surprising that India’s household gold reserves account for about 40% of the GDP of the country. After all, most Indians consider gold one of the safest forms of investment. But investing in physical gold also comes with its fair share of issues. Here are the most important ones-

  • Buying physical gold is costly
  • Storing gold is expensive because it requires additional security
  • You get value out of your gold holdings only after you sell them
  • You lose up to 15% to 20% of the value of the gold by making charges every time you change the form of gold

But what if you could make better gold investments? Investments that are a lot cheaper, guarantee better returns, and help you save on taxes? We’re talking about gold bonds!

Wondering what these gold bond investments are? Here are a few things about these bonds you need to know.

What is a gold bond?

Put simply, a sovereign gold bond (SGB) is a type of government security that is a substitute for physical gold. Investors can buy these bonds from the RBI on a per unit basis, wherein every gram of gold issued as per the bond has 999% purity. And that’s not all. Investors can buy and hold the bond for a term of eight years and earn interest at a rate of 2.5% every year on them.

Investors can also buy SGBs anytime at a cost equivalent to the closing price of gold from three working days before the point of purchase. And they can redeem the bond by selling it at a price according to the latest base data.

Now that you know what a gold bond is all about, let’s take a better look at how they work.

How do SGBs work?

Typically,government gold bonds or SGBs get issued by the RBI in small numbers or tranches throughout the financial year. Investors can buy these bonds via banks, brokers, online platforms and even post offices! Investors can buy SGB units from secondary markets like stock exchanges too.

Investors can choose to get physical, dematerialized, or digital SGBs from any distributor. They need to subscribe for the SGB by paying the issuance cost by cash, DD, cheque, or other digital payment modes to get their SGBs. Keep in mind that investors buying physical bonds will need to credit their bonds with their DEMAT accounts by putting in a special request.

Once the government gold bonds reach maturity, investors can redeem them at the market value of gold at that time. Not to mention, investors holding the bond also earn interest at a fixed rate on their holdings annually.

Benefits of gold bond investments

  • Tax benefits

Gold bond investments have greater tax benefits compared to physical gold. This is because physical gold is treated as a non-financial asset with a holding period of three years. Any sale during this period is subject to short term gains tax at the peak rate. Post this holding period, sales attract taxes as long-term gains. Here the taxation rate will be 10% without indexation benefits or 20% with indexation benefits.

But gold bond redemptions are tax-free, and investors can redeem them after five years of holding. Keep in mind that the interest on bonds is subject to taxation according to Section 43 of the Income-Tax Act, 1961, and gold bonds sold in stock markets will still be taxed at extant rates.

  • Interest earnings

Unlike physical gold, investors earn interest at 2.5% on their SGBs. The interest earned partially compensates for inflation risks even after taxation, given that the RBI assures the returns.

  • They can be used as collateral

Investors can use government gold bonds as collateral for loans. The loan to value ratio (LTV) will be similar to regular gold loans. However, the decision to grant the loans in exchange for SGBs will be in the hands of the lender.

Who can invest in SGBs?

Resident Indians, trusts, charitable institutions, universities, clubs, societies, HUFs, partnership firms, and even private or public limited companies can invest in SGBs. Keep in mind that individuals can buy a maximum of 4 kg of gold via an SGB, while partnerships can buy a maximum of 20 kgs of gold through these bonds. Additionally, individuals can nominate people for these bonds too.

In conclusion

Now that you know what a gold bond is, you will agree that buying one is far more profitable than buying real gold. After all, with an SGB, you get all the benefits you get while investing in physical gold, along with better interest rates and tax exemptions. What’s more, you can have peace of mind because you don’t need to worry about storing physical gold and keeping it safe.

So, if you want to diversify your portfolio and invest in gold, do it the smarter way with gold bonds. Check out Tata Capital’s Moneyfy app today!

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