Sovereign Gold Bonds (SGB)
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. Investing in SGBs helps diversify your portfolio by adding an asset class like gold. It aids in potential wealth creation as the value of gold tends to appreciate over time. SGBs are suitable for investors who have a long-term investment horizon and have an affinity for gold as an investment option.
What are SGBs?
SGBs are a financial instrument introduced by the Government of India to provide individuals the opportunity to invest in gold without physically owning it. They are issued in multiple tranches throughout the year and carry a specific tenor, usually ranging from 8 to 12 years. SGBs offer a return linked to the price of gold and provide investors with an assured interest rate of 2.50% per annum.
Benefits of SGBs
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Diversification
SGBs allow investors to diversify their portfolio by adding an asset class (gold) that has a low correlation with other investments like stocks and bonds.
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Potential Wealth Creation
Investing in gold through SGBs provides an opportunity for capital appreciation as the price of gold tends to rise over time.
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Interest Income
SGBs offer an assured interest rate of 2.50% per annum payable semi-annually on the invested amount.
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Capital Gains Tax Exemption
SGBs enjoy capital gains tax exemption if held until maturity, making them more tax-efficient compared to physical gold.
Tax implications of
SGBs
Interest earned on SGBs is taxable as per the income tax slab of the investor. However, capital gains arising at maturity are exempt from capital gains tax. In case of a premature exit from the investment, capital gains tax may be applicable as per prevailing tax regulations.
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Risks associated with
SGBs
-
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Market Risk
The value of SGBs can fluctuate based on the prevailing market price of gold, which may affect the returns at the time of redemption/sale.
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Liquidity Risk
SGBs have a limited secondary market, making it challenging to sell them before maturity.
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Sovereign Risk
While SGBs are backed by the Government of India, there is still a theoretical risk of default, although highly unlikely.
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