HomeNewsGuidesReadsPodcastsTRANSFIN. EOD
  1. Reads
  2. Lite

Investing in Sovereign Gold Bonds: All You Need to Know

Professor of Financial Economics and Part-time Value Investor, Transfin.
Oct 11, 2018 7:09 AM 3 min read

In spite of the recent liquidity crunch, lofty fuel prices, Rupee woes, and volatile markets - consumption drives our Festive narrative. A recent initiative of the government seems to agree.


For our gold-obsessed nation, the Government of India In consultation with the RBI will launch new series of the Sovereign Gold Bond (SGB) Scheme, which will open for subscription from April 20th. These bonds are largely positioned as a substitute for investing in physical gold and comes across as an effort to reduce gold imports, limit current account deficit, and deter a Rupee sell-off while the masses chase the bullion, at least metaphorically. Here's a summary of key things you need to know on SGB.


Sovereign Gold Bonds are RBI issued financial instruments which are denominated in grams of gold and its returns are linked with the price of gold.

Sovereign gold bonds are financial debt instruments which are positioned as a proxy for investing in physical gold. Investors pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bonds are structured such that the returns are inextricably linked with gold price. These bonds can also be used as collateral for loans and carry sovereign guarantee on account of them being issued by the government.


[Listen in from 4:25 onwards to learn more on the Sovereign Gold Bond Scheme]


Sovereign Gold Bond scheme was first launched in November 2015; Heightened attractiveness due to lower risk and cost of storage.

The bonds are aimed to orchestrate a partial switch in domestic savings used to purchase physical gold to financial savings while preserving the underlying exposure to gold. As outlined above, the return on these bonds are linked with the fluctuating gold price, but given the financial nature of investment, they carry lower risk and cost of storage.


In-line with ongoing efforts to lower gold imports and reduce current account deficit, government launched the Sovereign Gold Bond Scheme FY19.

The bonds carry 2.5% interest rate alongside a capital gains tax exemption on redemption. These bonds will be sold every month from October 2018 to February 2019 through banks, stock exchanges, post offices etc. The term of the bond will be eight years with exit option(s) in the fifth, sixth and seventh year. The bonds are eligible for conversion into demat and can be used as collateral for loans with loan-to-value (LTV) ratio in-line with physical gold loan as mandated by RBI (maximum LTV of 75%). The interest on gold bonds will be taxable as per the provision of Income Tax Act, 1961.


Gold was left out from the list of 'non-essential imports' which were subject to an increase in import duty; Sovereign Gold Bond Scheme FY19 partially addresses it.

Gold and crude oil have played a pivotal role in India’s widening current account deficit, considering both are primarily traded in the International markets in USD. However, the government chose not to increase import duty on gold when it raised duty on non-essential imports last month to narrow the current account deficit. In that context, Sovereign Gold Bond Scheme FY19, is structured to broadly achieve the same goal - disincentivize import of physical gold. It offers a meaningful alternative to investors seeking gold exposure without actually importing it while allowing it to be freely traded in public markets.