Thread by @MoneyWell_

Sovereign Gold Bond 101

Planning to invest in gold?
SGB is the one you must opt for.

Better than Digital or Physical gold❗

Why?

Here's why 👇

What is SGB?

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. In return, the investor receives a digital certificate.

Every year the Central Bank of a country opens application for SGBs for a short amount of time.

Like, In india the Central bank opens a plan to sell SGBs in six different phases in a year.

But @MoneyWell_ why should I invest in SGBs, you ask? That's because :-

1️⃣ The investors will be compensated at a fixed rate of interest at 2.50% per annum payable on the nominal value. Different country's Central banks have different policies.

2️⃣ Unlike physical gold, there is no issue of storage when it comes to investing in SGBs, hence they are more secure.

3️⃣ No income tax. You don't have to pay any capital gain tax on the profit you make by selling the SGB after its maturity period.

4️⃣ There is no goods and services tax (GST) levied on sovereign gold bonds, unlike gold coins and bars. When you buy digital gold, you need to pay 3% GST just like in the case of buying physical gold.

5️⃣ Sovereign gold bonds can be used as collateral for loans.

6️⃣ You don't have to pay any making charges unlike for physical gold.

7️⃣ The government also offers discounts on SGBs if the investor applies through online mode and payment made through digital mode.

Now that you know what's SGBs & why you must invest in it, let us understand it with an example :-

Let say,
The Central bank of india opens the first tranche of SGBs.

Minimum quantity = 1 gram
Price = Rs. 4650/gram
(Based on Market value of physical gold)
Maturity = 8 years

Though the tenure of the bond is 8 years, early encashment/redemption of the bond is allowed after 5th year from the date of issue.

The SGBs are also tradable on stock Exchanges, if held in demat form. It can also be transferred to any other eligible investor.

So, Mr. Bean reads my thread and decides not to invest in physical gold (Which his wife had suggested), and opted for SGBs.

He purchased 5gram worth of SGBs.
Investment = 5*4650 = Rs.23,250
Maturity period = 8 years

Every year Mr. Bean receives a nominal interest of 2.50% on his initial investment.

After 8 years,
Gold's market value = 75,000 (10g)

So,
SGBs value = 7500 (1g)

If Mr. Bean sells his SGBs on maturity, his profit would be -
Investment made = Rs.23,250
Current Market value = Rs. 37,500
(7500*5g)

Gain = 37,500 - 23,250
= Rs. 14,250

🔖 If you remember, you don't have to pay any tax on the gains.

Key takeaways 🔑
- Safe than physical gold
- Interest received on investment
- Government backed investment
- No capital gain tax if held till maturity
- Chance of capital loss - Incase the market value of gold after maturity is less than what you had invested.

How to Invest in SGBs?

Go to your nearest bank branch and enquire about the SGB.

So that was "Sovereign Gold Bond 101!
I hope you found it useful.

For more educational threads on money, finance, and economics, do follow the page @MoneyWell_

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