In the whole world, Gold has its universal value and has been globally recognised since ancient times. Over a period of time, it became a quantifiable monetary unit due to its scarcity, purity and malleability, making it a natural medium of exchange. And through this, Gold introduced the concept of money to the world.
Have you ever thought that as the currency continued to grow in tangible and intangible forms, it would make Gold lose its value? Well, the answer is No; in fact, this pious and precious metal has grown widely in popularity and desirability. However, it may no longer serve as a currency but is a strong asset class cherished for its durability and aesthetic appeal by both individuals and governments.
India: The largest consumer of Gold
People in India perceive Gold as a symbol of purity, power, and prosperity. Gold always tends to enjoy the prestigious position and forever remains in the hearts and minds of the people and our land’s culture. After China, India has the world’s second-largest market of gold jewellery. India is the world’s biggest importer of gold, primarily to meet the demands of the jewellery industry. In terms of quantity, the country imports an annual average of 800-900 metric tonnes of gold. Other than crude petroleum, gold is the second most imported commodity by the Indian government.
| Year | Gold Imported (Rs. In crores) | Trend (YoY) | Percentage of Total Imports |
| 2022-23 | 287393 | -24.23% | 4.90% |
| 2021-22 | 379272 | 49.15% | 8.29% |
| 2020-21 | 254288 | 27.62% | 8.72% |
| 2019-20 | 199250 | -13.19% | 5.93% |
| 2018-19 | 229537 | 5.74% | 6.39% |
| 2017-18 | 217072 | 17.69% | 7.23% |
| 2016-17 | 184439 | -11.11% | 7.16% |
The substantial gold imports have significantly impacted the fiscal deficit, resulting in adverse effects on the economy, such as currency depreciation, decreased GDP, and increased outflows of foreign currency. In an effort to reduce the demand for gold, the government has implemented higher duties. Last year, the central authority raised the gold import duty from 10.75% to 15% as a measure to control the current account deficit (CAD). As a result of the increased import taxes and global economic uncertainties, there has been a decline in gold imports, as evident in the above table.
In order to optimize the demand for Gold, the Government of India has introduced Sovereign Gold Bonds as another option for investment besides physical Gold, which has the same amount of financial security.
What are Sovereign Gold Bonds?
The Government of India (GOI) introduced the inaugural Sovereign Gold Bonds through a Gazette notification as part of the Government Monetization Scheme on October 13, 2015. The first tranche of Gold Bonds was issued at a price of Rs. 2,684 per gram.
Working Mechanism of Sovereign Gold Bonds?
SGBs are issued by the RBI on behalf of the Government of India, and its working mechanism is stated below:-
- Eligibility for Investors – Investors are required to make the payment for the issue price in cash, and the bonds will be redeemed for cash upon maturity. Any investors who belong to Hindu Undivided Families (HUFs), Retail investors, trusts, and charitable institutions can invest in SGBs. On the issuance date of the SGB, customers will receive a Certificate of Holding. This certificate can be obtained from issuing banks, SHCIL offices, post offices, designated stock exchanges, agents, or directly from the Reserve Bank of India (RBI) via email.
- Interest Rate – Gold Bonds provide a fixed annual interest rate of 2.50% on the initial investment amount. The interest earned will be credited to the investor’s bank account twice a year on a semi-annual basis. Upon maturity, the final interest amount, along with the principal amount, will be paid to the investor. Gold Bond’s maturity value is calculated as the simple average of Gold’s closing price with 999 purity, as stated by the Indian Bullion and Jewellers Association Limited, for the last three business days of the week, prior to the maturity period.
- HUF/ Retail Investors – A HUF (Hindu Undivided Family)/ retail investor can invest in a minimum of 1 gram of gold up to a maximum of 4Kgs per year. In a fiscal year, the trusts and the corporations can hold up to 20 kgs of Gold.
- Tenure – Bond’s tenure will be of 8 years and comes with a lock-in period of 5 years.
- Redemption – The redemption of the bond is only permitted after the fifth year from the date of issuance, specifically on the coupon payment dates. After the completion of the mandatory 5-year lock-in period, the Reserve Bank of India (RBI) usually provides redemption windows every six months. Investors can utilize these windows to complete the premature encashment of their investments.
- Tradability – If the bonds are held in Demat form, then they can be tradable on Exchanges. Before the time of maturity, it can be transferred to any other eligible investor as per the provisions mentioned in the Government Securities Act 2006.
- Taxation – On Gold Bonds, 2.5% of the interest amount given to the investor is taxable as per the applicable tax slabs. But the investor is free from the TDS (Tax Deducted at Source) deduction as it is not imposed on the interest payments made to the investor. Along with this, if the investor experiences any capital gains on redemption, that is also completely tax exempted.
| Tenor | 8 years |
| Interest | 2.5% p.a. (semi-annual) |
| Issuer | RBI |
| Eligible Investors | Individuals, HUFs, Trusts, Charitable Institutions, etc. |
| Maturity Value | Simple Average of 3 days gold rate, preceding maturity period |
| Transferability | Yes |
| Lock-in period | 8 years |
| Early Redemption | After the lock-in period, on the date of interest payment |
| Interest Taxable | Yes, as per the slab rate |
| Capital Gains on redemption | Tax-exempt (after five years lock- period) |
| Capital gains on transferred bonds | If long-term capital gains, indexation benefit is provided |
| Quantity permitted | Individual/HUFs 1gm-4kgs per year Trusts/Corporations 1gm-20kgs per year |
Reasons to Invest in Sovereign Gold Bonds
- Capital Appreciation – When the price of gold rises, then the increase can be seen in the prices of Sovereign Gold Bonds. If the Sovereign Gold Bonds are held till the time of maturity, the investor can enjoy the benefits from capital gains equivalent to the increase in gold rates over the 8-year tenure. If SGBs are transferred through Demat Account, the prices are going to be determined as per the demand and supply on the exchange.
- Regular Income – The Reserve Bank of India (RBI) announced the semi-annual payment of 2.5% during the issuance of Gold Bonds. Regardless of the performance of the market, investors are guaranteed these returns.
- Inflation protected – Normally, when inflation arises, the value of money tends to start decreasing. In contrast, the prices of gold usually exhibit an inverse reaction. Resulting, investors can confidently beat inflation and enjoy the benefit of the increased gold rates.
- Tax Benefits – SGBs are one of the few securities available, offering a complete exemption from capital gain on redemption. Only the coupon interest rate is subjected to tax. TDS is not levied on the payouts. An investor doesn’t have to incur 3% GST like in the case of the purchase of physical gold.
- Sovereign Guarantee – The Sovereign Gold Bonds are supported by the Reserve Bank of India (RBI), eliminating the possibility of issuer default.
- Diverse portfolio – An investor can reduce his risk with diversity in his portfolio. Gold is usually deemed to have an inverse relationship with the Equity indices. The investor can mitigate his risk by increasing the categories of financial securities.
- Digital Convenience – The investor can manage and monitor his funds invested in SGB digitally, making it a very smooth process for the user. He doesn’t have to stress about traditional gold’s safety and storage aspects. The demat option and online portals only help save time and efforts of the end user.
How have gold and gold bonds fared since the issuance of SGBs
| Year | Gold Price per gm (24 kt) | Trend (%) |
| 2015 | 2634 | -5.94% |
| 2016 | 2862 | 8.65% |
| 2017 | 2967 | 3.65% |
| 2018 | 3144 | 5.97% |
| 2019 | 3522 | 12.03% |
| 2020 | 4865 | 38.13% |
| 2021 | 4872 | 0.14% |
| 2022 | 5267 | 8.11% |
| Apr-2023 | 6204 | 17.78% |
Gold rates have given investors an absolute return of 135% since 2015. If an investor has made up their mind and chosen to invest in physical gold, he would have gained the absolute same return of 135% but would be subject to a 20% long-term capital gains tax.
If an investor had invested in the first tranche of SGBs, in Nov 2015, he would have received 2.5% interest every year. Moreover, he will be able to redeem his gold bonds in November 2023 at the market price without any capital gain tax. Assuming the gold price remains at Rs.6204/gm, he will reap a 135% absolute return without taxation on his capital gain. The return earned by an SGB investor is significantly high compared to an investor in tangible gold.
Comparison of various Gold Investment options
For ages, traditional investors were most likely to invest in physical Gold, but as time progressed, investors started looking for other options which are somewhat related to Gold, like digital gold, gold Exchange Traded Funds (ETFs), gold mutual funds and Sovereign Gold Bonds.
- Physical Gold – This remains the most popular option in our country. Around 75% of households in India own cumulatively approximately 25000 tonnes of gold. Cash is the most preferred method of buying gold (almost 9,0%), and its major purpose is jewellery. Physical gold is not still perceived as an investment, and its role extends to culture, worship and fashion. Demand for gold is majorly for the jewellery industry, and the other 3 options cannot substitute for the same. They can only attract investors who wish to invest in gold, not consumers who want to enjoy gold!
- Digital Gold – There are various apps offering the purchase of digital gold. They also come with the option to convert to physical gold. It is an emerging option with many investors, as the paradigm shift is slowly happening. Some companies can invest as low as Re.1 in digital gold.
- Mutual Funds and Gold ETFs – These are traded on stock exchanges quite similar to shares, gold mining/refining stocks and physical gold as the primary underlying assets. In order to invest in Gold ETFs, a Demat Account is highly mandatory. Various AMCs manage Gold Mutual Funds with a fund structure primarily investing in Gold ETFs. The key differentiator between ETFs and SGBs will be the interest pay-outs and tax benefits enjoyed by the later. The benefit of investing in SCBs is clearly more beneficial for the consumer.
| Gold Investing Options | Risks | Costs |
| Physical Gold | Theft, purity issues. Loss during the manufacturing process, Volatility of Gold Prices | Storage costs, GST of 3%, Making charges for jewellery |
| Digital Gold | Insufficient Regulations, Volatility of Gold Prices | GST @ 3% |
| Gold ETFs | The Volatility of Gold Prices | Brokerage & expense ratio |
| Gold Mutual Funds | The Volatility of Gold Prices | Management Fees |
| Sovereign Gold Bonds | The Volatility of Gold Prices | No extra cost to consumers over the issue rate by RBI |
Conclusion
Gold Bonds offer investors a unique opportunity to participate in the gold market while enjoying the benefits of fixed returns and tax advantages. These bonds are backed by the government and supported by the Reserve Bank of India, and it is perceived as a secure and reliable investment option by the investor. Traditionally and culturally, gold is India’s most coveted metal. And Indian psyche will surely accept its digital variants and derivatives and continue being bullish on this quintessential commodity. With the RBI backing the same in the form of SGBs, we have no second thoughts about its efficiency. SGBs will attract investors to digitize gold and still enjoy its returns.
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