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Sovereign Gold Bonds - The Best Alternative of Physical Gold?

Are you a gold lover? Do you consider gold a good investment?

Well, gold is close to our hearts and It is certainly worth someplace in our portfolio.

But what if I tell you that you can earn a regular income from your gold holdings?

No, I'm not talking about price appreciation, I'm not obviously telling you to trade in it.

I'm talking about regular cash inflows.

Allow me to introduce you to SGB or Sovereign Gold Bonds.

As you noted that there's a term called 'bond' in it. So first let's understand in brief a concept of what we call a 'bond'. A bond is a tool or certificate through which a government or an organization borrows money from the public. They borrow money against which they pay interest on regular intervals & sometimes provide tax benefits too.

For example, let's say I'm the govt. and I want to borrow money from you. I ask you to lend me ₹1000 against which I'll issue you my bond and I will be paying you 7% (i.e ₹70) as an interest every year, for the next 5 years. And at the end of the 5th year, I will return you ₹1000. So every year you earned an interest income of ₹70. That's the conceptual understanding of a bond.

Now, what is this SGB?

SGB is government security whose price is linked to the market price of gold (999 purity, 24k gold), which means the value of this security/bond is equal to the market value of gold, making it an alternative to physical gold. The denomination itself is kept in grams (1 bond = 1 gram).

The bond here is issued by RBI on behalf of the Government Of India. So yes your money is completely safe.

So what makes it special?

Holding an SGB will fetch you an extra income in the form of interest. You will earn 2.5% interest on Its face/purchase value annually. That's what makes it more than just an alternative to physical gold.

Here's an example:

If you buy 1 gram of SGB for ₹4590 (current market price), you will get ₹114.75 every year till its maturity, which is 8 years.

However, there's an exit option too at the completion of the 5th, 6th, and 7th year.

But why should I invest in it rather than simply purchasing gold?

Well, here it becomes more interesting. Here are some of Its benefits.

  • Price Benefits:

The price of a bond is directly linked to the price of gold but with no extra cost of making charges that are generally levied on physical gold.

  • Income Benefits:

There's a saying, something is always better than nothing. Physical gold won't get you any cash inflows, the only chance that you will earn from it is by an increase in gold prices.

While SGB will pay you 2.5% as an interest every year on the face value/purchase value.

  • Tax Benefits:

Capital gains (if any) are tax exempted. This means you won't have to pay any taxes.

Suppose you buy 1 gram of SGB of ₹4590 and at maturity price increased to ₹6000. So the capital gain of ₹1410 is totally tax-free.

However, Interest income arising from SGBs shall be taxable as per the investor's tax bracket.

Indexation benefit is available if sold before the maturity period.

  • Holding Benefits:

You can hold this bond in a Demat form too.

It eliminates the risk of loss, theft, and storage expenses. You can also trade it on stock exchanges if you hold it in Demat form, which allows you to sell it even before it's maturity period.

If you don't have a Demat account you can just keep it in a form of a certificate. So you don't need to worry much about its safety.

We at Your FinMan believe that you should only invest in something when it is suitable for your profile. Yes, something is always better than nothing but don't forget to consider these points too.

  • The tax benefit is available only when you hold it till maturity, for 8 long years.

  • You can sell it off only on stock exchanges or either to some person off the market. So that makes it a bit complex.

  • Exit option is available after completion of the 5th year.

Sure it has Its own benefits but also has few limitations. So do consider all the factors.

For more information and FAQs I'm providing the link to RBI's official website. Click here to visit RBI's Website.

What do you think about SGB, is it good? Comment down your views.

And of course, feel free to ask your queries, we will be happy to help you out.

Till then see ya. Stay safe.


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