Sovereign Gold Bonds
Employ your capital for low tax or tax free, risk free and predictable returns.
What is SGB?
Sovereign Gold Bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India periodically. SGB’s are a way to invest in gold without actually buying physical gold.
Minimum Investment
One has to invest in a minimum of 1 gram of gold and can purchase in multiples of grams.
Interest Rate
Firstly, they offer a fixed interest rate, providing regular income on the invested amount. Additionally, SGBs track the prevailing market price of gold, allowing investors to benefit from potential appreciation in gold prices over time. Moreover, the capital gains from the redemption of SGBs are tax-exempt if held until maturity, enhancing overall returns.
Features
Start with investing in just 1 gram of gold.
Tax benefits
Fixed interest + gold appreciation
Example
Let's say an investor invests Rs. 1,00,000 in SGBs at the price of rs 5000 / gram which makes it 20 grams.
So, P = Rs. 1,00,000
r = 2.5% per annum = 0.025
n = 2 (since interest is compounded semi-annually)
t = 8 years
A = 100000(1 + 0.025/2)^(2*8)A ≈ Rs. 127,296.58
Total interest earned = 1,27,296 - 1,00,000 = 27,296
Therefore, the future value of the investment (including interest) after 8 years would be approximately Rs. 127,296.58.
Gold Price Appreciation:
Let's assume the price of gold increases by 5% annually.
For simplicity, let's assume the initial price of gold is Rs. 5,000 per gram.
After 8 years, the price of gold would increase by 5% annually for 8 years.
Plugging in the values:
FV = 5000 * (1 + 0.05)^8
FV ≈ Rs. 7,975.05 per gram
Therefore, after 8 years, the price of gold would be approximately Rs. 7,975.05 per gram.
Profit per gram = 7975 - 5000 = 2975
For 20 grams = 59,500
Total value of investment
= Principal Amount + Total interest earned from SGB’s + Gold Appreciation
= 1,00,000 + 27,296 + 59,500
= 1,86,796
= 86.79 % returns
Why invest in SGB’s?
Safety and Security
SGB’s are issued by the RBI on behalf of the government and hence are backed by the government. They carry a sovereign guarantee and are considered to be safer than other forms of investment in gold.
No making charges
SGB’s are not associated with any sort of making or storage charges unlike physical gold and are therefore a cost-effective investment in gold.
Fixed Income
Unlike physical gold which only provides returns based on the price of gold, SGB’s provide an additional fixed interest on top of the potential appreciation of gold.
Long-term Investment:
SGB’s have a tenure of 8 years that promotes long-term investment.
SGB v/s Physical Gold
| Sovereign Gold Bond (SGB’s) | Physical Gold |
|---|---|
| Provide a fixed return on investment. | No interest earnings. |
| Convenient - Paper or digital format. No need for physical storage. No security risks. | Requires physical storage. Risk of theft or loss. |
| Issued by the government. Hence it carries sovereign guarantee. | No government backing. |
| Capital gains exempted if held till maturity. | Capital gains tax applicable. |
| Liquid - can be sold anytime as it is listed in the stock market. | Liquid - requires additional efforts to be sold. |
Chart for Physical Gold vs Digital Gold vs ETF vs SGB
| Physical Gold | SGB | |
|---|---|---|
| Entry Price | 26,000 | 26,000 |
| Price of gold after 5 years | 30,000 | 30,000 |
| Profit | 4000 | 4000 |
| Interest received @ 2.5% pa | 0 | 3458 |
| Total profit earned | 4000 | 7458 |
| Tax | 800 | 0 |
| Selling Price | 29200 | 33458 |
FAQ’s
Get in touch
Get started with your planning
Book a 1-to-1 call with our experts for personalized guidance, seamless onboarding, and resolution of any queries you may have.
