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Dhanteras 2019: Should you buy sovereign gold bond instead of physical gold?

Naveen Kumar     October 22, 2019

The government on Monday launched the sixth tranche of Sovereign Gold Bond (SGB) for 2019-20 in order to cash in on the festive mood when most people prefer to buy gold considering it the auspicious time of the year. Launched at Rs 3,835 per gram, the series VI of the SGB will remain open for subscription until Friday (October 25), which also happens to be Dhanteras. People who apply for the bond will be issued the same on October 30. Investing in Sovereign Gold Bond may be a good option for those planning to make a purchase on Dhanteras and don't want to keep physical gold at home.

Benefits of buying SGB

Gold has seen a significant rally (around 21 per cent) so far this year. As per India Bullion and Jewellers Association, gold with 999 purity that was priced at Rs 31,660 per 10 gram on January 1 this year, is now trading at Rs 38,177 per 10 gram.

To make the SGB attractive among individual investors, the government gives additional benefits. Over and above the value of the gold, the SGB pays you an additional interest of 2.5 per cent on the nominal value of the gold. This interest is paid to subscribers after every six months.

If you apply for the bond online and make payment through a digital medium, you get an additional discount of Rs 50 per gram, that is, Rs 3785 per gram for the ongoing SGB.

Buying physical gold is inadvisable because you have to pay a GST of 3 per cent and an annual locker fee to banks if you keep it there for safety purpose. However, no such costs are involved in SGB.

Also Read: Sovereign Gold Bond Scheme open for subscription: All you need to know

Tax advantage of SGB

There is no TDS deduction on the interest you earn on SGB at the interval of 6 months. However, interest earnings are included in your income for the concerned financial year and you have to pay income tax as per the applicable income tax slab. The capital gains that an individual makes at the time of redemption after holding the bond for eight years will be exempted from the tax. But, if you transfer the bond midway, the capital gains tax will be applicable after indexation.

Pre-mature redemption

SGB is issued for eight years, but pre-mature redemption of the bond is permitted after five years since the issuance of the bond. The redemption price is fixed in the Indian currency (rupee) and the redemption price is based on simple average of closing price of gold of 999 purity of the previous three working days, published by the India Bullion and Jewelers Association Limited.

How to apply for SGB?

You can apply for this bond directly or through agents at scheduled commercial banks (excluding regional rural banks, small finance banks and payment banks), designated post offices, stock holding corporation of India (SHCIL) and recognised stock exchanges. National Stock Exchange and Bombay Stock Exchange are authorised to receive applications for the bonds. Many of these institutions are accepting both online and offline applications.

Also Read: Sovereign Gold Bond Scheme opens: All you need to know

Should you go for the bond?

Gold has traditionally been considered a hedge against economic uncertainties and a preferred asset class to diversify investments. However, most experts believe the allocation in the yellow metal should not be more than 10 per cent. So, if your portfolio mix has some scope for adding gold within the given limit, you may go ahead with the purchase.

Besides, if you have plans to buy physical gold in future for children's wedding or other gift purposes, you should subscribe to SGB now, the value of which will grow with the rate of the gold and you will also get additional interest benefit. After redemption, you can very well purchase the desired physical gold.

On top of it, with SGB, you save on the safekeeping and storage cost that you will otherwise incur on the physical gold.

Future issuance of SGB

The government will issue SGB four times before the end of the financial year in March 2020. The subscription window generally remains open for five working days. The seventh tranche of the SGB will open on December 2.

Also Read: Sovereign Gold Bonds 2019-20 Series III: Issue price fixed at Rs 3,499 per gramme; subscription opens on August 5

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