Gold, a precious metal, holds a special place in Indian culture.

For centuries, Indians have shown a keen interest in owning gold in the form of jewellery or coins.

There are various schemes available in the market for gold purchases and investments. However, after the Indian government launched the sovereign gold bond scheme in 2015, investors started opting for this instrument.

Sovereign gold bonds emerged as a more accessible, affordable, safe, and convenient way to invest in the yellow metal.

Prices of gold have appreciated historically, so investment in gold bonds becomes an attractive option. Investors benefit from the appreciation of gold prices while earning interest on these bonds.

As India's economy grows, retail investors are increasingly looking for portfolio diversification and turning to gold bonds.

What Are Sovereign Gold Bonds?

Sovereign Gold Bonds are a type of government-issued security that allows investors to invest in gold in a paperless form. They are a substitute for actual physical gold.

The Sovereign Gold Bonds are issued with a tenure of 8 years with an option to exit after the fifth year. They offer a fixed rate of interest of 2.5% per annum, payable semi-annually.

These bonds are denominated in a gram of gold per unit, with each unit's value derived from one gram of 999-grade gold.

The price is determined by averaging the closing gold prices for the three business days preceding the subscription period.

The India Bullion and Jewellers Association Limited publishes these closing prices.

Likewise, the redemption price is computed using the most recent base data from the bullion association.

Gold bonds can also be traded on exchanges. Sovereign Gold Bonds are liquid and can be redeemed or sold when required by retail investors.

The sovereign gold bonds are issued through a specified subscription period every year and are sold through designated banks, RBI's Retail Direct Platform, and post offices. The application form can also be downloaded from the RBI's website.

Eligible Investors

Individual investors, Hindu undivided families (HUFs), universities, and charitable trusts can invest in sovereign gold bonds as defined under the Foreign Exchange Management Act of 1999.

Individual investors that have changed their residential status to a non-resident may continue to hold sovereign gold bonds till early redemption or maturity. However, non-residential investors cannot hold these bonds.

Even minors are allowed to own sovereign gold bonds, but the guardian must fill out the application on behalf of the minor.

The RBI has also allowed joint holding for these bonds, and the limit of investments applies to the first applicant.

The minimum investment limit in sovereign gold bonds is one gram, while the maximum limit for individual investors and HUF is 4 kilograms. For trusts, the investment limit is 20 kilograms.

The maximum limit applies for these bonds based on the subscription under different tranches annually.

Interest on sovereign gold bonds will be taxable per the investor's income tax bracket. However, the capital gains tax arising from the redemption of sovereign gold bonds to an individual investor has been exempted. Tax deducted at source (TDS) is not applicable for the bonds.

An investor should meet above mentioned eligibility criteria and provide a valid identification document such as a PAN card and bank account details to get the allotment of sovereign gold bonds.

Benefits & Risks

• Investors have several advantages over holding physical gold. These include:
• No storage or security costs like the physical gold.
• No making charges as the gold is held in dematerialised form.
• Option to earn interest on a semi-annual basis.
• Issued by government so they enjoy government backing
• Easily traded on stock exchanges that offer investors liquidity.
• Can be used to secure bank and financial institution loans.

Listed commercial banks offer sovereign gold bonds online, and investors can get a discount of ₹50 per gram by applying online.

The only risk that sovereign gold bonds carry is the market price risk, where an investor can lose capital if the price of the gold declines. However, the investor does not lose gold units allotted at the purchase time.

Overall, sovereign gold bonds offer investors a convenient and secure way to invest in gold and earn a fixed interest rate while getting the benefit of appreciation in the price of gold.

Source-Reserve Bank of India,Media Reports,Bankbazaar.com