Akshaya Tritiya Golden Insights: Gold or Bond? Know Before You Invest

On the auspicious occasion of Akshaya Tritiya, a day revered for its association with prosperity and abundance, the tradition of purchasing gold holds deep significance across difference regions of India.

While some embrace the day by adorning themselves with gleaming gold jewellery or acquiring precious coins, others view it as an opportune moment to fortify their financial horizons through gold investments. However, the path to gold acquisition demands thoughtful considerations, aligning one's financial standing and aspirations with strategic investment choices.

In this feature, we delve into prominent avenues of gold acquisition: Sovereign Gold Bonds (SGB) and physical gold to help you make an informed decision for investment.

Golden Trends: Insights into the Gold Market

As of today, the gold rate in India stands at Rs 73,940.00 per 10 grams for 24 karat Gold, marking a significant figure in the realm of precious metal investments. Reflecting on the past year's trajectory, gold has showcased a remarkable 16% uptick in value since the last Akshaya Tritiya, observed on April 22, 2023.

Within this period, the price of 10 grams of gold has surged by a substantial Rs 11,300, ascending from Rs 59,845 to its current standing above Rs 71,100.

Forecasts from seasoned experts paint a promising picture for prospective investors, suggesting that an investment made today could potentially yield returns ranging between 7% and 19% by the next Akshaya Tritiya. Looking further ahead, industry pundits anticipate a continued ascent in gold prices, with projections indicating a minimum 10% appreciation, poised to reach Rs 76,000 by the approaching year.

Unraveling the Mysteries of Gold Investments: SGB, Digital Gold and Physical Gold

What is SGB and Digital Gold?

Sovereign Gold Bonds (SGB) are government securities denominated in grams of gold, issued by the Reserve Bank of India (RBI) on behalf of the Government of India. These bonds offer individuals the opportunity to invest in gold without possessing physical gold. Digital gold, on the other hand, is a digital investment avenue where individuals can buy, trade, or hold gold using online platforms or mobile apps, without the need for physical storage.

According to experts that both SGB and digital gold are viable options for investment this Akshay Tritiya. The choice between the two depends on the investor's risk appetite and investment horizon. For short-term investments (one to three years), digital gold offers better liquidity, while for long-term investments (five to eight years), SGB presents better returns.

Some experts however argue for SGB as the superior investment vehicle for gold due to several reasons supporting including the ease of investment, RBI backing, dematerialized form, elimination of storage costs, assurance of market value, and the unique feature of earning 2.5% interest annually, which is not available with other gold-holding methods.

Physical jewellery, on the other hand, depends on the immediate requirement, occasion, and sentiment of the buyer. There is no substitute for physical jewellery, especially for occasions such as weddings, festivals, or other rituals. The price of gold jewellery also rises in tandem with the gold rate in the bullion market, but it always entails the risk of storage, making charges, and purity.

What advantages does investing in SGBs offer over purchasing physical gold?

Well, firstly, when you invest in SGBs, the quantity of gold you're paying for is safeguarded. This means you receive the prevailing market price upon redemption or premature redemption. Plus, SGBs provide a superior alternative to holding gold in physical form by eliminating the risks and costs associated with storage. Additionally, investors can rest assured knowing they'll receive the market value of gold at maturity, along with periodic interest. Unlike gold in jewelry form, SGBs are exempt from concerns like making charges and purity issues. Moreover, SGBs are securely held either in the books of the RBI or in demat form, mitigating risks such as loss of scrip, among others.

Moreover, returns earned through SGB are completely tax-free upon maturity.

Delving into Sovereign Gold Bonds

What Makes SGB Unique

SGBs provide a protected quantity of gold, ensuring investors receive the ongoing market price at redemption. They eliminate the risks and costs associated with physical gold, offering assurance of market value and periodical interest.

Understanding Risks in SGBs

While there may be a risk of capital loss if the market price of gold declines, investors do not lose in terms of the units of gold paid for.

Eligibility, Application and Authorized Agencies To Sell SGBs

Residents in India, including individuals, HUFs, trusts, universities, and charitable institutions, are eligible to invest in SGBs. Joint holdings and investments by minors are permitted.

Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.

A customer can apply online through the website of the listed scheduled commercial banks. The issue price of the Gold Bonds will be Rs 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.

Investment Limits and Norms

SGBs are issued in denominations of 1 gram of gold, with a maximum limit of 4 kilograms for individuals per fiscal year. KYC norms, including providing a PAN number, apply. Each family member can buy the bonds in his/her own name if they satisfy the eligibility criteria given by RBI.

Interest and Redemption

SGBs bear interest at 2.5% per annum, payable semi-annually, with tax-free returns upon maturity. Redemption is in Indian Rupees, based on the simple average of the closing price of gold of 999 purity over the previous three business days from the repayment date, as published by the India Bullion and Jewelers Association Limited.

Both interest and redemption proceeds will be credited to the bank account provided by the customer during the bond purchase.

Encashing Bond, Premature Redemption and Exiting Investment

Premature redemption is allowed after the fifth year from the issue date, on coupon payment dates. Bonds held in demat form can be traded on exchanges or transferred to eligible investors.

For premature redemption, investors must approach the respective bank/SHCIL offices/Post Office/agent at least thirty days before the coupon payment date. The proceeds will be credited to the provided bank account.

Gifting Bonds and Using As Collaterals for Loans

The bonds are transferable to relatives/friends/eligible individuals. Transfer is governed by the Government Securities Act 2006 and Regulations 2007 through execution of a transfer instrument.

Furthermore, the SGBs can be used as collateral for loans from banks, financial institutions, and NBFCs. Loan to Value ratio applies as per RBI guidelines, subject to the decision of the lending entity.

Tax implications and TDS

Interest is taxable under the Income-tax Act, 1961. However, capital gains on redemption are exempted for individuals, with indexation benefits available for long-term gains. TDS is not applicable. However, compliance with tax laws is the responsibility of the bond holder.

Nomination facility

The buyer and choose a nominne for the SGB. Nomination is available as per Government Securities Act 2006 and Regulations 2007. A nomination form is provided with the application form.

Are the bonds available in demat form?

Yes, upon specific request in the application form, bonds can be held in demat account. Until dematerialization is complete, bonds will be held in RBI’s books.

The bonds held in demat form can be traded on stock exchanges. They can also be sold and transferred according to Government Securities Act, 2006 provisions.

Procedure in the eventuality of death of an investor

The nominee/nominees can approach the respective Receiving Office with their claim. In the absence of nomination, executors/administrators or holders of succession certificates may submit claims.

Additional Features

SGBs offer flexibility, allowing online application and trading after the fifth year. They can also be used as collateral for loans.

As investors navigate the realm of gold investments, understanding the nuances of SGBs and digital gold is imperative. Whether prioritizing liquidity or long-term returns, each option presents distinct advantages. Ultimately, informed decision-making tailored to individual financial goals is key to harnessing the potential of gold investments.

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