Advantages and Disadvantages of Sovereign Gold Bond (SGB) Investment

March 04, 2019

advantages-disadvantages-SGB-investment

Gold has always been one of the most reliable and popular investment options in India. But to limit the import of this precious metal, the Government of India launched the Sovereign Gold Bond (SGB) scheme in 2015. Since then, it has continued to launch different tranches of this scheme at regular intervals.

As compared to investing in physical gold and other popular investment options, SGB is known to offer a host of valuable benefits. However, there are a few drawbacks too. Let us have a look at some of the most important advantages and disadvantages of SGB to help you make a smart investment decision-

Advantages

1. Interest payment

One of the biggest Sovereign Gold Bond scheme benefits is the interest payment. The government offers a fixed annual interest rate on your SGB investment. This interest payment is divided into two parts and is paid every 6 months to the investor.

Irrespective of whether the cost of gold rises or falls, you are guaranteed to receive the interest.

2. Paper and Demat Format

To eliminate the cost and concern of storing physical gold, the SGB is available in paper and demat format. When you invest in SGB, you do not receive physical gold but a holding certificate.

This means that you do not have to worry about the safety of gold or pay an annual fee for storing it in a bank locker. The certificate will be in your name and with zero risks of getting stolen.

3. Tax Benefit

Sovereign Gold Bond scheme tax benefit is important too. No TDS is applicable on the interest you receive from your SGB investment. You are also allowed to transfer the bond before maturity and gain indexation benefit.

If you redeem the bond after maturity, even the capital gains tax will be exempted. However, the interest is fully taxable as per your income tax slab.

Disadvantages

1. Maturity

A lot of investors are discouraged by the gold bonds because of long maturity period of 8 years. However, this long tenure is actually one of the most important gold bond benefits.

The government has kept the maturity long in order to prevent gold price volatility resulting in losses for the investors. It is also important to note that investors can also redeem the bond after 5 years from the date of investment.

2. Capital Loss

Your investment in SGB can result in a capital loss as the bond value is directly linked to the price of gold in the international markets. If the price at which you buy the bond is higher than the price at which you redeem it at maturity, you might end up in a loss.

But gold is an important commodity and the government consistently works to keep its price stable. And if you’ll remain invested for 5-8 years, the chances of capital losses are minimal. However, the possibility cannot be completely eliminated.

Should you invest in Sovereign Gold Bond?

There is no single investment option that can meet the requirements of every investor. But if the gold bond tax benefit, government guarantee, and interest payment are taken into consideration, there is no denying that SGB is one of the best ways to achieve portfolio diversification with investment in gold.

Before investing, make sure that you thoroughly understand the advantages as well as the disadvantages and try to match them with your requirements to make the right decision.

 

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