Sovereign Gold Bond, abbreviated as SGB, is a government security issued by the Reserve Bank of India (RBI) on behalf of the Government of India. It is denominated in grams of gold and is linked to the price of gold in India. It is also an interest-bearing bonds, carrying an interest of 2.5% p.a. paid in two installments in a year.[1][2]
The bond has an 8-year term with an option for early withdrawal through the RBI after 5 years. It is listed and traded on Indian stock exchanges, allowing eligible investors to buy or sell anytime through their dematerialization accounts. It can also be transferred to another eligible investor without redemption through the RBI.[3]
History
The scheme was introduced due to a forex crisis caused by high gold imports.[4] It was first notified by the Department of Economic Affairs on 14 January 2016 under the Government Securities Act, 2006. The initial subscription required a minimum of 2 grams and a maximum of 500 grams. It was open from January 18 to January 22, 2016. The bonds initially paid 2.75% interest per year, later reduced to 2.5% per year.[5][2] The bonds were sold through banks, post offices and through online securities brokers which would allow investors to hold the bonds in demat form.[6][7]
In August 2024, the investors who would have redeemed the bonds issued in August 2016 lost suffered a loss due a fall in the price of gold. This fall was linked to the slash in import duty on gold from 15% to 6% during the 2024 Union budget of India.[8]
After the final redemption of the 2016-I series, it was rumoured that the scheme was turning out to be very expensive for the Indian government, due to an unexpected rise in the prices of gold. The government also felt SGBs have also not served the purpose for which it was launched, which was to bring down gold imports by trying to move demand from physical gold to an electronic form. In addition, the RBI has not issued any new series after February 2024.[9][10] The government also made physical gold purchases more attractive, by lowering the import duty from 15% to 6%.[11]
The bonds are issued in 1-gram denominations and multiples thereof. Each eligible investor can purchase up to 4 kg per financial year. A demat account is optional; bonds can be held in dematerialized form with a securities depository or tracked by the RBI.[3]
Price
The issue price is the average closing price of 999 purity gold from the last 3 business days before the subscription period, as published by the India Bullion and Jewelers Association Limited (IBJA). The redemption price, for both early and maturity redemptions, is the average closing price from the 3 business days before repayment.[12]
Comparison with other forms of gold investments
SGBs, purely as an investment format, can be compared to other forms of investing in Gold.[13]
Comparison of SGB, physical gold, gold ETFs and mutual funds and digital gold in India
SGB
Physical gold
Gold ETF and mutual funds
Digital gold
Storage
Stored in government facilities. Very low risk of theft.
Note: CAGR calculations do not include interest payments and are post-tax, since capital gains tax arising on redemption of SGB to an individual has been exempted.[16]
^Sabnavis, Madan (20 November 2023). "India wants gold, not gold bonds". Business Line. Archived from the original on 1 December 2023. Retrieved 26 July 2024. Sovereign gold bonds (SGBs) were introduced in the country in FY16 against the backdrop of a forex crisis, which was fuelled partly by high gold imports.
^Iyengar, Suresh P. (15 August 2024). "SGBs turn costly affair for govt, fail to curb imports". Business Line. Archived from the original on 21 August 2024. Retrieved 3 September 2024. The fund-raise through sovereign gold bonds (SGB) has turned out to be a costly proposition for the government as the gold prices have more than doubled compared to the issue price.
^"Why are SGBs giving the government second thoughts?". Finshots. 21 August 2024. Archived from the original on 3 September 2024. Retrieved 3 September 2024. The SGB scheme may have turned into a bigger challenge than the government originally planned. And if gold prices keep climbing, we won't be surprised if we just see the end of Sovereign Gold Bonds altogether.
^Sinha, Shishir (17 November 2024). "Sovereign gold bonds losing favour with government". The Hindu Business Line. Archived from the original on 17 November 2024. Retrieved 17 November 2024. The fate of SGB seems to have been sealed when the government lowered import duty on gold to 6 per cent from 15 per cent, making physical gold purchases more attractive than investments in SGBs.
^Das, Basundha (11 February 2024). "Sovereign Gold Bond Series IV FY24: How are SGBs taxed? Details here". Business Today (India). Archived from the original on 11 February 2024. Retrieved 20 July 2024. The interest earned from Sovereign Gold Bonds is subject to taxation as per the regulations of the IT Act, 1961. However, when an individual redeems the SGB, they are exempted from paying capital gains tax. Additionally, investors enjoy indexation benefits on long-term capital gains, whether they choose to transfer the bond to another person or not.
^Kaul, Abhinav (9 February 2024). "Sovereign Gold Bond 2016-I matures; gives 13.6% return and outperforms gold funds". Moneycontrol. Archived from the original on 10 May 2024. Retrieved 15 May 2024. According to a recent Reserve Bank of India (RBI) notification, the price for the final redemption was Rs 6,271 per unit of SGB, which is based on the simple average closing price of gold for the week of January 29-February 2, 2024.
Saranya, S; Antony, Nittymol (16 July 2024). "Influence of Social Media on Investment Decisions of Women with Special Focus on Sovereign Gold Bonds". Artificial Intelligence (AI) and Customer Social Responsibility (CSR). Springer. pp. 603–612. doi:10.1007/978-3-031-50939-1_46. ISBN978-3-031-50939-1.