SGBs: As the Reserve Bank of India is not issuing any new tranche for Sovereign Gold Bonds, investors now are willing to buy the government-backed gold bonds from the secondary market, i.e. the stock exchanges. Investors have the option to acquire Sovereign Gold Bonds through the primary market when the government declares subscription periods or via the secondary market by trading on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
The price of Sovereign Gold Bonds (SGBs) in the secondary market is primarily influenced by the forces of supply and demand, akin to how other financial securities are traded. It is observed that SGBs often trade at a price lower than the prevailing spot price of gold due to market dynamics and investor sentiment.
According to a report in the Economic Times, SGB prices have shot up by at least 7-8% on the National Stock Exchange (NSE) compared to the actual 999 purity gold price. Aksha Kamboj, Vice President of India Bullion & Jewellers Association (IBJA) and the Executive Chairperson of Aspect Global Ventures, said: “SGBs are trading in the stock market at 7-8% premium in anticipation of fear of more SGB tranches not being announced by the Government.”
Premature redemption
Last week, RBI officially announced the calendar for the premature redemption of sovereign gold bonds (SGB) that were issued between the periods of May 2017 and May 2020.
According to the schedule outlined by the RBI, a total of 30 SGBs are set to be redeemed starting from October 11 and continuing until February 7, 2025. The redemption price for these bonds will be determined by the RBI, taking into consideration the average gold price observed during the last three days preceding the maturity date.
How to buy SGBs from the secondary market
The National Stock Exchange (NSE) website provides comprehensive guidance on Sovereign Gold Bonds (SGBs) in the Frequently Asked Questions (FAQ) section. According to the guidelines, SGBs are authorised for trading on stock exchanges upon a specified date announced by the Reserve Bank of India (RBI).
It is important to note that only SGBs held in demat form with depositories are permissible for trading. Furthermore, the sale and transfer of bonds must adhere to the regulations outlined in the Government Securities Act of 2006. Moreover, partial transfers of SGBs are facilitated under the stipulated provisions.
To purchase Sovereign Gold Bonds (SGBs) through the stock market, you must follow these steps:
Step 1: Identify discounted or high-yielding SGBs on the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).
Step 2: Locate the SGB scrip code in your demat account and place a buy order for the desired quantity.
Step 3: The purchased SGBs will be credited to your demat account within one working day (T+1) of the transaction.
Tax implications
It’s important to note that the tax treatment for exiting a gold bond investment varies based on the chosen method. If you decide to exit your gold bond investment early, the tax implications will differ. There are two primary ways to exit a gold bond investment:
Early Redemption: This option allows you to redeem your SGBs at the end of 5 years. Selling in the Secondary Market: You can also choose to sell your bonds in the secondary market.
In both scenarios, capital gains will be subject to taxation based on the conventional classification of short-term and long-term capital gains. For short-term gains, the tax rate imposed will be at its highest level. In contrast, for long-term gains, investors are presented with the option to select either a fixed tax rate of 10% or 20% post indexation evaluation.
SGBs serve as financial assets whose classification depends on the holding period. When held for 12 months or less, SGBs are deemed short-term assets, leading to short-term capital gains (STCG) upon sale. Conversely, if held for longer than 12 months, SGBs transition into long-term assets, resulting in long-term capital gains (LTCG). The taxation rate for LTCG on the sale of SGBs on or after 23 July 2024 stands at 12.5%.
Minimum and Maximum Limits for Investing in SGBs
When considering the purchase of gold bonds through online platforms in India, potential investors are advised to adhere to a minimum investment requirement of 1 gram (source).
Furthermore, it is essential to be mindful of the maximum limits prescribed for investments in sovereign gold bonds, which are outlined below:
For individual investors and Hindu Undivided Families, the maximum allowable investment is 4 kilograms.
Charitable organizations, trusts, and universities have a higher investment threshold, set at 20 kilograms.
Additionally, it is important to note that the investment ceiling of 4 kilograms applies to the primary holder in instances of joint ownership.