Want to invest in SGBs through demat route? Here’s a guide

India is one of the largest markets for gold, and growing affluence is driving growth in demand. Gold has a central role in the country’s culture, considered a store of value, a symbol of wealth and status, and a fundamental part of many rituals. 

Gold has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio. Investors have been able to recognise much of gold’s value over time by maintaining a long-term allocation and taking advantage of its safe-haven status during periods of economic uncertainty.

Gold stands out among other asset classes due to its exceptional liquidity, often serving as collateral in challenging circumstances. Investing in gold offers various avenues, including jewellery, bars, coins, and gold ETFs. 

Additionally, investors have the option to invest in gold through Sovereign Gold Bonds (SGBs).

Also Read: Sovereign Gold Bonds: From advantages to eligibility; all you need to know

In recent years, investors have been showing a growing preference for investing in SGBs as a means of allocating funds to gold compared to alternative options for investing in gold. 

In this article, we will explain how to use different options including demat account to invest in these bonds. 

What are Sovereign Gold Bonds? 

Sovereign Gold Bonds (SGBs) are a unique investment avenue that combines the attributes of gold with the convenience of bonds. These bonds are issued by the Reserve Bank of India, aiming to provide individuals with an opportunity to invest in gold without physically owning it.

Launched by the government in November 2015 under the Gold Monetisation Scheme, the Sovereign Gold Bond scheme opens for subscription in tranches by the RBI in consultation with the Government of India. The RBI periodically issues these bonds through scheduled commercial banks, designated post offices, and recognised stock exchanges.

Also Read: What is the tax treatment for sovereign gold bonds? MintGenie explains

Typically, SGBs have an eight-year tenor with the option to exit after the fifth year on interest payment dates. They offer a fixed rate of interest, payable semi-annually, determined by the government at the time of issuance, currently set at 2.50% per annum.

SGBs are denominated in multiples of grams of gold, with a minimum denomination of 1 gram and a maximum of 4 kilograms for individuals and Hindu Undivided Families (HUFs) in a financial year. Backed by the government, SGBs are considered risk-free investments.

It's important to note that SGBs are exclusively available for sale to resident Indian entities, including individuals (individually, on behalf of a minor child, or jointly with another individual), HUFs, trusts, universities, and charitable institutions.

Also Read: How to switch depository participants without changing your demat accounts?

How to invest in SGBs?

Investors have two primary options for investing in Sovereign Gold Bonds: online through their demat accounts and net banking, or offline through authorised financial institutions such as banks and designated post offices.

Demat Account Route: Investors can buy and sell SGBs using their demat accounts. These bonds, available on the exchanges, were issued earlier and are now accessible in the secondary markets.

Also Read: Demat Account: All you need to know about off-market transfer

One reason investors opt for SGBs via their demat accounts is their availability on the exchanges at prices differing from the reference gold price. With the buy-back option after the fifth year, SGBs on exchanges have various maturity dates, allowing investors to choose based on their investment horizon and goals.

SGBs are also listed and traded in the cash segment of the Bombay Stock Exchange and the National Stock Exchange. Online payment for these bonds can be facilitated through the Stock Holding Corporation of India Limited (SHCIL) and other authorised brokers. 

Also Read: Demat Account: What precautions should you take while using it?

Net Banking: Investors can also pay for the SGBs online by paying for the bond using the Net Banking option. Online investors avail of the bond at a discounted price of ₹50 per gram on the purchase value.

Offline Investment: Alternatively, investors can invest in SGBs offline by visiting authorised financial institutions such as banks and designated post offices. These institutions facilitate SGB purchases through physical application forms and payment methods like cash, cheques, or demand drafts.

Offline investment may appeal to investors who prefer traditional banking channels or seek in-person assistance for their investment transactions.

FAQs

What is a Sovereign Gold Bond and who issues it?

SGBs are government securities denominated in grams of gold, serving as substitutes for holding physical gold. Investors purchase these bonds at the issue price in cash and redeem them in cash upon maturity. The Reserve Bank issues the bond on behalf of the Government of India.

Why should I choose SGB over physical gold? What are the benefits?

Investors enjoy protection for the quantity of gold they pay for, receiving the prevailing market price at redemption or premature redemption. SGBs offer a superior alternative to holding physical gold by eliminating the risks and costs associated with storage. Investors are guaranteed the market value of gold at maturity, along with periodic interest. SGBs eliminate concerns such as making charges and purity associated with gold in jewellery form. Moreover, bonds are held in the RBI's books or in demat form, reducing the risk of loss.

What risks are associated with investing in SGBs?

There is a potential risk of capital loss if the market price of gold declines. However, investors do not suffer losses in terms of the units of gold they have paid for.

Who is eligible to invest in SGBs?

Individuals resident in India, as defined under the Foreign Exchange Management Act, 1999, are eligible to invest in SGBs. Eligible investors include individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. Individual investors who subsequently change their residential status from resident to non-resident may continue to hold SGBs until early redemption or maturity.

What are the tax implications on interest and capital gains?

Interest earned on the bonds is taxable under the Income-tax Act, 1961 (43 of 1961). However, capital gains tax arising on the redemption of SGBs to an individual is exempted. Indexation benefits are provided for long-term capital gains arising from the transfer of bonds.