What are Sovereign Gold Bonds? Everything You Need to Know

A Sovereign Gold Bond is a financial product introduced by the Indian government in November 2015. The price of these bonds moves in line with the price of gold thus, making it an alternative to investing in physical gold. 

To decide whether this financial instrument is suitable for you, you have to understand it in detail. This article provides insights into what is the sovereign gold bond, its features, benefits, and risks. 

What is a Sovereign Gold Bond? 

The Reserve Bank of India (RBI) issues a Sovereign Gold Bond (SGB) on behalf of the government. SGB can be attractive to investors since it offers a 2.5% interest as well as price increase (or decrease) of gold. 

The main reason for the introduction of SGB was to encourage individuals to invest in SGBs rather than buying physical gold because India is heavily dependent on gold imports therefore, to lower the burden of imports, RBI introduced SGBs. 

Features of Sovereign Gold Bonds 

Let us look at the key features of SGB: 

1. Tenure: The central bank issues SGBs for a tenure of 8 years. After 8 years, the bonds mature, and money is transferred to the investors. After 5 years, investors can prematurely redeem their SGB holding with the RBI. Long-term investors who want to park their money in gold for long periods can find SGBs attractive. 
2. Denomination: The price of the bond moves in tandem with the price of gold, and the minimum denomination is equal to 1 gram of gold. Investors can buy sovereign gold bonds for a minimum of 1 gram worth of gold. Small denominations make it easier for retail investors. 
3. Investment Limit: The maximum permissible investment limit in SGB is 4 kgs for individuals and HUFs and 20 kgs for trusts for a financial year. All family members can have their individual 4kg holdings. 
4. Interest: SGBs offer a 2.5% interest semi-annually, and it is taxable. The interest component of SGBs makes it an attractive choice for investors as compared to gold ETFs, digital gold, etc. 
5. Price Determination: The buying and redemption price of SGBs is determined by the India Bullion and Jewelers Association Limited. SGB prices are based on the simple average closing price of gold of 999 purity of the previous three business days.

Benefits of Sovereign Gold Bonds 

Sovereign gold bonds have benefits that might be attractive for some investors. The benefits are as follows: 

1. Capital Gains Tax Exemption: For individuals, if SGBs are held until maturity (8 years), they are exempt from capital gains tax. But premature redemption, that is, after 5 years, will attract long-term capital gains (LTCG) tax when sold on a stock exchange. A premature redemption done through RBI’s window will not attract LTCG.
2. Tradeable on Exchanges: You can buy and sell SGBs on stock exchanges. Once an individual is allotted SGB, they can sell these on exchanges. Selling SGB before one year will incur short-term capital gains tax. 
3. Collateral for Loan: Sovereign gold bonds can serve as collateral for loans from banks and financial institutions. If an investor needs immediate access to funds and they are not willing to redeem their SGB, they can borrow money against their SGB holdings. 
4. Dual Benefit of Interest and Appreciation: Sovereign gold bonds provide the dual benefit of appreciation of gold price and a 2.5% interest. This feature makes them more attractive than other vehicles for investing in gold. 
5. Hassle-Free Handling: Physical gold requires a safe or a locker, and it is difficult to store. It is also prone to theft. But SGBs come with the benefit of hassle-free handling, meaning they are in digital form and do not require any physical handling. 
6. Sovereign Guarantee: Sovereign Gold Bonds are released by the RBI under the authorization of the Government of India, which makes them unlikely to default. Securities issued by the government are considered safe and default-free since the government can print more money and pay off its obligations. 

Risks of Sovereign Gold Bonds

Although SGBs come with their own benefits, there are some risks associated with them too. 

1. Decline in Gold Prices: You can face losses on your SGB investment if the price of gold declines. Suppose you purchased an SGB for Rs. 8000 a gram, and for some reason, after 8 years, the price of the SGB declines to Rs. 6000 it will be redeemed at that price. Thus, you can incur losses on SGBs.
2. Interest from SGB is Taxable: The interest received from sovereign gold bonds is taxable at an individual’s income tax slab. 
3. Taxed when Sold in Secondary Market: Short-term capital gains tax can apply if you sell your SGB holding on the stock exchange before 1 year, and long-term capital gains tax will apply if you sell your holdings after 1 year. 

Remember, the LTCG tax is only applicable if bonds are sold on exchanges. If they are redeemed with RBI (prematurely or after maturity), these are exempt from capital gains tax. 

Key Considerations Before Investing in SGBs 

Before investing in Sovereign Gold Bonds (SGBs) investors must consider these factors: 

• Investors with a long-term horizon can add SGBs to their portfolio and hold them until maturity to enjoy possible capital appreciation and exemption on capital gains tax.
• SGBs are suitable for investors who want to invest in gold but do not want to handle physical gold.
• Before buying SGBs from the stock exchange, investors must check the maturity dates as some might mature in the upcoming financial year.

Why has RBI not Issued SGBs in FY25?

The RBI has not issued a single round of SGB in FY25. The SGB program started in 2015, with RBI issuing these bonds multiple times each year. 

The SGBs are not backed by real gold. They are issued and redeemed based on the prices of gold. The money collected by the RBI is used by the government. When RBI started the program in 2015, gold was trading around Rs. 2,500 per gram, which has since climbed to reach around Rs. 8,000 per gram in 2025. 

This price increase has significantly increased the redemption liability of the RBI since it would now have to redeem these bonds at a much higher price than these were issued for. RBI is facing significant losses in its SGB issuances that were issued at lower gold prices. 

Conclusion 

Learning what are sovereign gold bonds is essential for investors if it is a good option for investors to invest in gold. Investors should keep in mind that prices of SGBs change with the changes in gold prices. Any decline in gold prices can lead to losses. An SGB trading on a stock exchange might be trading on a premium. Investors should perform detailed research before investing in SGBs.Are you willing to start your investment and learning journey? Download the Powerup’s Financial Management app today!