Gold is gold. No other replacement for the precious metal for ages. Everyone wants to accumulate gold for future use. Are you averse to hold physical gold and looking for alternatives? Maybe digital gold is your ideal choice. Read this post to know about the Government of India’s Sovereign Gold Bond Scheme.
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What is Sovereign Gold Bond Scheme in 2021?
Sovereign Gold Scheme is a digital gold scheme launched by the Reserve Bank of India (RBI) in 2015 to reduce the huge demand for physical gold. Indians’ appetite for gold is depleting India’s forex reserves as a majority of the gold is imported. To overcome this and to inculcate the habit of owning digital gold equivalent to physical gold, the Government of India launched the scheme.
Hows does the Sovereign Gold Bond Scheme work?
In the SGB scheme, you can buy a 1gm of digital gold equivalent to 1gm of physical gold. You can accumulate up to 4Kg of digital gold. The scheme is not available all over the year. The SGB scheme is released in tranches and is open to subscription during a certain period of the year. The gold you purchase through the SGB scheme has a lock-in period of eight years. However, you may redeem such gold after completion of five years. The RBI fixes the issue price based on the average gold rate during the last 3 days prior to the issue date. Similarly, the price for redemption is likely the last 3 days’ average price of the gold.
If you hold gold bonds, you can transfer them to anyone in the secondary market through the Demat account. Keep in mind that any transfer before 3 years will attract short term capital gains. Short term capital gains will be added to your total income and taxed at slab rates. Also, the limit of 4kg of digital gold applies across all issues. Suppose if you buy 2 kg digital gold in the previous issue, the maximum that you can subscribe to in the current issue is only 2 kgs.
Advantages of the SGB Scheme over physical gold
Sovereign Gold Bond Scheme gives you an interest of 2.5% per annum on your investment credited semi-annually. This is over and above the appreciation in the gold price that you may get. It gives you the flexibility of holding digital gold. Digital gold offers safety and will save you from risks associated with holding physical gold. While buying physical gold, you may incur changes like making charges and also you pay GST on gold. Such expenses are not there in the case of digital gold. In addition, the storage fees in the form of bank locker charges, etc. also will hamper the returns you generated over physical gold.
Sovereign Gold Bond Scheme Income Tax Benefit
If you hold gold and sell it, you incur capital gains which attract capital gains tax based on the period of holding. If you sell the gold bonds through the secondary market after 3 years, then you incur long term capital gains with indexation benefit. Indexation allows you to account for inflation part of the capital gains that you incurred. Whereas, if you hold gold bonds, the long term capital gains that you may incur on the redemption of gold is exempted from income tax. However, the interest accrued over the digital gold is taxable and is added to your total income.
How to subscribe to the Gold Bond Scheme?
The RBI opens up the issue in tranches and currently, the Sovereign Gold Bond Scheme 2020-21 Series X is open for subscription till Jan 15th. You can invest in these bonds through commercial banks, the stock holding corporation of India, and designated post offices. You can also hold them in Demat form provided you mention the same while submitting the application form. There’s a special discount of Rs.50 when you subscribe to the SGB Scheme online.
Should you invest in digital gold?
If buying and storing physical gold is a concern for you, you may consider buying digital gold. Apart from possible appreciation in the gold price, digital gold also offers an additional interest of 2.5% per annum on your investment. Chances are that your investment in SGB might give better returns than returns on physical gold. The gold has given double-digit returns in CY 2019 & 2020. Investors hope that this gold rush continues for some more time.
Prices of the yellow metal have been on the higher side due to the strengthing of the US dollar and higher bond yields. However, the risks for the gold price in the near future include the change in the US Administration, the world economic recovery, and the COVID-19 vaccine.
Sovereign Gold Bond Scheme 2021 Series X Details:
Issue open: January 11th, 2021 Issue close: January 15th, 2021 Price fixed: ₹5104, ₹5054 (online with discount)
Related: Read everything you need to know about a Gold Loan.
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