MUMBAI: Indians have taken a fancy to sovereign gold bonds (SGBs) in the past two years, coinciding with the Pandemic’s appearance on the world stage. Indian investments into SGBs in FY21 and FY22 (through January) accounted for 68% of the total investments into these bonds since their issue in FY16. In FY21 and FY22 (April-January) residents subscribed to bonds worth Rs 25,712 crore, accounting for 68% of the total investment of Rs 37,906 crore since the SGB scheme was launched in November 2015.
What makes SGBs attractive
“SGBs lure is the interest income, apart from the potential capital gain probability. This makes for a compelling reason for investors to invest in SGBs at a time when interest on bonds and FDs are declining, and there is a rising need for asset allocation as more and more investors jump on to the stock market bandwagon,” points out Amol Joshi, founder PlanRupee Investment Services.
The SGBs offer an interest rate of 2.5% per annum on the amount of initial Investment, payable semi-annually. Apart from potential capital gains, the interest component is attractive given scheduled commercial banks’ weighted average domestic term deposit rate has fallen 187 basis points during February ‘19-November ‘21 as RBI cut the repo rate by 250 bps during the same period.
An increase in the number of aware investors may have bolstered interest in SGBs. The number of stock market Demat accounts have doubled in November 2021 from March 2019. As more investors jump onto the stock market bandwagon, they look for means of asset allocation to balance risk-reward, which implies that investors will look at spreading investments into fixed income, paper gold, etc.
Benefits of investing in SGBs for long-term investors surpass those of physical gold, which entail paying for making charges, storage and insurance, and gold ETFs, which though more liquid, involve an expense ratio of as much as 0.5% an annum, points out Suresh Sadagopan, MD & principal officer, Ladder7 Wealth Planners.
“The gold ETF has its own benefits like facilitating entry-exit with more ease than SGB, but in addition to the risk of capital loss, it also involves paying the fund house expense. I’d say it’s more for a short-term investor,” adds financial planner Manissha Bangera.
At Rs 37,906 crore subscribed value as of January 2022, SGBs exceed the gold ETFs’ net assets under management which stood at Rs 18,405 crore as of December 31, 2021. In terms of SGB tax treatment, the capital gain on maturity amount — if held for eight years — is exempted. An exit option exists after the fifth year from the date of issue on interest payment dates. The treatment on capital gains otherwise is the same as for debt mutual funds.
If held for less than three years, capital gains are added to income and taxed at the relevant slab. For more than three years, 20% tax with indexation is applicable. The interest income on the bond is added to the bond holder’s income and taxed at the applicable slab.