Best Way to Invest in Gold | Sovereign Gold Bonds | Regular Income from Gold

Indian's love for Gold is never-ending. We Indians love buying gold on every occasion of life. The sale of Gold is most during Indian festivals. Giving gold as a gift to the bride is a tradition of every Indian marriage. This makes India one of the largest consumers of Gold.

There are two types of buyers of Gold. One that buys Gold for investment Purpose and others that buy gold for consumption or internal satisfaction. With regards to Investment Purpose, the problem here is that we buy it in jewelry form. When you buy Jewellery, you have to pay for something called making charges. Second the purity, this is something which is always you can't be sure about. This may depend upon the place or store you buy. The third is safety, if you keep at home, there is always a fear of getting stolen. Even bank lockers are not safe. Fourth polishing charges, after some years, you may feel the need to polish the jewelry. Hence when it comes to investing, we need to look for alternative options other than physical Gold.

Let us look at the different options available to us for Investing in Gold.

Out of the above, the best alternative for Investment in Gold currently is Sovereign Gold Bonds. Gold ETF and Golds funds too are good options but in this post, we will focus on Sovereign Gold Bonds and Physical Gold.

Now let us look at Sovereign Gold Bond Scheme is in detail.

Sovereign Gold Bond Scheme:

With India being the largest consumer of Gold in the world. This rising gold demand leads to a rise in Gold Imports thereby contributing to the current account deficit of the country. This lead to the introduction of the Sovereign Gold Bond Scheme. This scheme is launched by the Reserve bank of India and is backed by the Government of India.

Sovereign Gold Bonds (SGB) are Government securities denominated in Grams of Gold. This scheme helps the investors to invest in paper gold rather than physical Gold. Here the investor pays the issue price in cash to buy the bond and the same bond will be redeemed in cash on maturity.

The best part about this scheme is that you get regular income in the form of Interest. The rate of interest is fixed at 2.50% per year, payable on a half-yearly basis. Hence what we get here is a dual benefit of Capital appreciation and regular inflow of interest.

Benefits of investing in this scheme:

• These bonds are issued by RBI hence it is completely safe to invest. No risk of default.
• No-Risk and cost of Storage. Since these bonds can be held in paper or electronic form.
• No making charges and issues related to Purity of Gold.
• 2.50% guaranteed interest given per year.
• Capital appreciation benefits.
• No Capital Gain Tax. No TDS applicable on interest
• These bonds can be used as collateral to get loans.

Disadvantages:

• The tenure of this bond is for 8 years. However, there is an option to redeem from the 5th year onwards.
• Interest earned is taxable as per the income tax slab.

Let's compare Sovereign Bonds with physical Gold and see which investment scores over the other.

Comparison between Physical Gold and Sovereign Gold Bonds:

As per the above comparison, Sovereign Gold Bonds definitely score over physical Gold.

FACTS About this Scheme:

Who can invest in this scheme?

Residents of India are eligible to invest in SGB. Eligible investors include individuals, HUF, Trusts, Universities, and charitable institutions.

What are the Minimum and Maximum limit for Investment?

The minimum investment in the bond is 1 Gram and a maximum limit of subscription is 4 kg for individuals, 4 Kg for HUF, and 20 Kg for Trusts.

What is the Tenure of the Bond?

The tenure of the bond is 8 years with an option to exit after the 5th year onwards.

What are tax implications on the "interest" and "Capital Gain"?

Interest received will be taxable as per your income tax slab. No TDS is applicable on Interest.

Capital Gain arising from redemption of SGB is fully exempt. No capital gain tax.

Where and how to buy?

All the leading banks and other banks provide the facility to invest in these schemes. This can be also purchased through post offices and authorized stock exchanges. These can be held in Paper as well as Demat form.

Can you apply online?

Yes, the customer can apply through the website of the banks. If you buy online, you will get a discount of Rs.50 per gram.

What is the KYC requirement?

You will need to provide PAN details or Aadhar card.

Upcoming Issues of Sovereign Gold Bond:

The Sovereign Gold Bonds will be issued every month from April 2020 to September 2020 as per the calendar specified below. You need to buy the SGB on the given date of subscription.

Note: The issue is priced at Rs. 4,852 per gram of Gold, with a discount of Rs.50 on cashless or net banking purchases.

Source: Kotak.com

This is how a Sovereign Gold Bond looks like:

Additional Tips:

1. Gold should not be your primary investment. However if one is looking to diversify across various asset classes, Sovereign Golds Bonds is an ideal investment considering returns and everything.

2. You should ideally keep a maximum of 5-10% of your portfolio in Gold.

3. SGB is a better investment option as compared to Gold ETF and Gold Mutual funds. In ETF and Gold funds investor pay fund management charges.

4. For the Long term goals, Mutual funds is currently is the best investment vehicle. They provide better returns in the long term. Hence if you have already invested in a mutual fund and looking to get some exposure in Gold then this is the Ideal Investment- SGB.

Do share your views regarding this scheme. Feel free to ask any queries.