Gold has traditionally been one of the most preferred investment options for many people in India. In the past few years huge amount of gold investments by Indians had been impacting growth of investments in financial investments like equities, all types of mutual funds and debt instruments like bonds, among others. This in turn, impacted the money available in the economy for its growth. This was one of the major reasons why the government came up with the Sovereign Gold Bonds Scheme.
The idea was to discourage people from buying physical gold and instead invest in a financial investment linked to gold. Here, we will try to answer a simple question: “Should you invest in the Sovereign Gold Bonds?” That’s coming up in a little while.
Efficient benefit of gold investment Investing in physical gold has many problems that the gold bond bypasses. When you buy a gold bond instead of physical gold you do not incur safekeeping costs. Remember, you need to lock up your gold in a bank locker. In a gold bond, there is also no fear of the usual gold impurity or loss from making charges.
Superior return to physical gold The government has promised a top-up interest payout of 2.75% per annum on gold bonds which will be paid semi-annually to the investor’s bank account. With physical gold, you only get the benefit of capital appreciation but in gold bond you get this extra interest benefit beside the capital appreciation.
Long holding period ensures stable return The bond is issued for a maturity period of 8 years. It saves investors from any mid-term volatility, as over the long term, the chance of any capital loss reduces substantially.
Liquidity option through exchanges You have the exit option from these bonds after completion of 5 years. These bonds can be traded on stock exchanges. Hence, people who need the cash mid-way, can theoretically sell their bonds on these exchanges if buyers are available. However, if you sell these bonds before maturity you would lose the tax benefits and need to pay taxes on the gains. Tax free return The gains made from these gold bonds are totally tax exempt if held till its maturity of 8 years. However, if you sell or transfer it early, long term capital gains tax will have to be paid after taking into account inflation indexation
