Introduction
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Explanation of what a Gold Bond is
A gold bond is a government-backed security that allows investors to buy and enjoy gold digitally. Unlike physical gold, gold bonds aren’t tangible assets, and the investor doesn’t take possession of the physical gold. Instead, the investor receives an instrument from the government for a specified quantum of gold. Gold bonds offer investors a secure and accessible way to invest in gold without worrying about storage, security, making charges, or other associated costs.
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Overview of the Popularity of Gold Bonds in India
Given its artistic and literal significance, gold has always been a popular investment choice in India. Further, the preface of gold bonds in 2015 has further fueled its popularity. According to the World Gold Council, India is one of the largest markets for gold, and gold bonds have emerged as a new-age investment option for retail investors. Since its launch, the Indian government has issued multiple tranches of gold bonds, which have been well-entered by investors.
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Reasons behind the popularity of Gold Bonds in India
The purpose of this blog is to claw deeper into the factors that have contributed to the popularity of gold bonds in India. One of the primary reasons for the popularity of gold bonds is the tax benefits they offer. There is an exemption of capital gains tax on gold bonds if held till maturity of 8 Years. Gold bonds also offer 2.5% p.a additional interest over and above appreciation in the price of gold. However, it is to be noted that tax will not be exempt from interest income and it would be chargeable to tax as per normal slab rates. This makes gold bonds an investment option for those seeking adequate returns without the hassle of storage and security.
Further, the security offered by gold bonds is another factor that has contributed to its popularity. The government backs gold bonds, making them a highly secure asset, and the investor is guaranteed the principal amount as well as any appreciation in the gold price at the time of redemption. Also, since gold bonds are digital, investors don’t have to worry about storage/ security issues or purity/ making charges/ GST associated with physical gold. As the Indian government continues to issue further tranches of gold bonds, it’s anticipated that their popularity will only grow further.
What’s a Gold Bond?
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Definition of a Gold Bond
Gold Bonds are fixed-income instruments that allow investors to invest in gold digitally without retaining physical gold. The government issues these bonds and SGBs are denominated in grams of gold i.e. 1 Bond = 1 Gram of gold. The bond price is determined on the basis of a simple average closing price for gold of 999 purity in the last three working days of the week preceding the subscription period.
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How do Gold Bonds work?
When investors purchase a gold bond, they advance money to the government in exchange for a fixed interest rate of 2.5% p.a. payable semi-annually. The bond has a maturity period of 8 years, with an option to exit the investment after five years. Upon maturity, the investor receives the ongoing market price of gold along with interest payments.
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Benefits of investing in gold Bonds
Investing in gold bonds has several benefits. Firstly, it provides a safe and secure way to invest in gold without storing physical gold. The hassle of maintaining the locker and the risks associated with handling physical gold are eliminated. Secondly, interest at a fixed rate is received on gold bonds at a fixed rate of 2.5% p.a in addition to capital appreciation in the price of gold, making it an attractive investment option for investors. The investors are assured of the purity of gold and sovereign gold bonds are eligible to be used as collateral for loans from banks, financial institutions, etc. SGBs are held in demat form in the account of the investor.
The popularity of Gold Bonds in India
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Historical perspective on demand for Gold in India
Historically, gold has held a significant artistic and profitable value in India. The demand for gold has constantly been high in India for centuries, and it has been used in various forms like jewelry, bars, and coins. Gold is viewed as a symbol of wealth and substance in Indian culture, and it’s also used for enduing purposes during carnivals and special occasions.
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Comparison with Physical Gold and Gold Bonds/ ETFs
Physical gold and digital gold like Sovereign Gold Bonds (SGB), Gold ETFs, etc. are popular forms of gold investment in India. Physical gold is bought in the form of jewelry, coins, or bars, and it’s generally stored at home or in a bank locker. Digital Gold, on the other hand, are instruments that allow investing in gold digitally and give investors the convenience of buying and dealing with gold like other tradable instruments.
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Government initiatives to promote Gold Bonds
Recently, the Indian government has introduced schemes to promote gold bonds over physical gold. Gold bonds are issued and backed by the government and they offer investors an occasion to invest in gold without the pitfalls associated with the physical storage and handling of gold.
Reasons for the Popularity of Gold Bonds in India
Gold bonds have gained immense popularity among Indian investors in recent times. Then are some reasons for their popularity:
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Convenience and safety of retaining paper gold
One of the significant reasons for the popularity of gold bonds in India is the convenience of retaining paper gold. Investors can invest in gold without worrying about physical gold’s safety and storehouse. Also, the bonds are issued in DEMAT form, making them easy to hold and transfer.
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Tax benefits
Gold bonds offer tax benefits, like tax exemption on capital earnings if held until maturity, and indexation benefits if vented before maturity. But it is to be noted that the interest income earned from gold bonds is taxable under the head “Other Source”.
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Liquidity and ease of trading
Gold bonds are traded on stock exchanges, making them more liquid than physical gold. Investors can buy and sell these bonds on the exchange, furnishing them with opportunity to sell the gold bonds before maturity if required.
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Potential for capital appreciation
Gold bonds give investors the eventuality for capital appreciation. The bonds’ price depends on the prevailing gold prices; hence, investors can profit from the rise in gold prices.
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Diversification of investment portfolio
Gold bonds offer an accessible way to diversify an investor’s portfolio, reducing the threat. It can be a safe haven in volatile markets, furnishing a position of stability to an investor’s portfolio.
Details of SGB Issues in the FY 2023-24:
| S. No. | Tranche | Date of Subscription | Date of Issuance |
| 1. | 2023-24 Series I | June 19 – June 23, 2023 | June 27, 2023 |
| 2. | 2023-24 Series II | September 11 – September 15, 2023 | September 20, 2023 |
How to Invest in Gold Bonds
Investors can invest through TheFixedIncome.com portal. It can also be purchased directly or through agents in offices or branches of Nationalized Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL), and authorized stock exchanges.
Eligibility criteria
To invest in gold bonds, you must be a resident existent, HUF, trust, university, or charitable institution. Persons residing in India as defined by the Foreign Exchange Management Act of 1999 may invest in SGB.
Application process
To invest in gold bonds, you need to follow the following easy steps. Register on TheFixedIncome.com and complete your KYC. Fill in the necessary details, like name, address, bank account details, demat details and the quantum of investment, and submit the form.
Minimum Investment Amount
The minimum permitted investment will be one gram of gold. The maximum contribution is 4 kilograms for individuals, 4 kg for Hindu Undivided Families (HUF), and 20 kg for trusts and other similar institutions, as periodically announced by the government. The cap is set based on the fiscal year (April to March).
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Holding and trading of bonds
Gold bonds have a tenor of 8 years, but you can trade them on the stock exchange before maturity. They can be traded on an exchange like any other instrument. The price of the bonds is linked to the prevailing price of gold, and the interest is paid semi-annually.
The risk associated with investing in gold bond
Gold bonds are investment instruments that offer investors a chance to invest in gold without needing to hold gold physically. While gold bonds offer some advantages, similar to diversification, they also come with certain pitfalls that investors should be apprehensive of.
A. Rate threat is one of the cons associated with gold bonds. This is because gold bonds are fixed-income securities, meaning their value is affected by changes in gold rates. If there is a decline in gold rates, then the value of gold bonds may take a dip, and investors may see a drop in their returns.
B. Holding – Capital Gain is exempt from Gold Bonds if held until maturity of 8 years, making it a viable option for investors looking for long-term investment options. It can, however, be traded on an exchange prior to that date, but the capital gain exemption will not be available in such cases.
C. The market threat is another threat associated with gold bonds. The price of gold is determined by market forces, and it can be volatile. Trading volumes can be insignificant, affecting the price of gold bonds. However, the value of gold bonds can fall as well due to global economic factors, and investors may incur losses if gold prices fall.
Conclusion
In conclusion, investing in gold has always been a favored choice for numerous investors in India, and with the preface of gold Bonds, it has become more accessible and popular. Gold Bonds offer a unique combination of security, convenience, and profitability, making it an option for those looking to diversify their investment portfolio. Gold Bonds are a great way to invest in gold without the hassle of physical holding and storehouse, offering a guaranteed fixed interest rate. Also, Gold Bonds provide 2.5% fixed returns and are exempt from capital gain taxes if held till maturity. It’s important to note that Gold Bonds also carry some degree of threat. Thus, it’s recommended to assess the terms and conditions before investing in Gold Bonds or any other investment options.
