Sovereign Gold Bonds (SGB) are a substitute for buying physical gold. These are government securities denominated in grams of gold issued by Reserve Bank on behalf of Government of India. The bonds are issued in denominations of one gram of gold and in multiples thereof. An individual can purchase a maximum of 4 kilograms worth gold bonds each financial year. These bond can be gifted or transferred to anybody as long as he is an Indian citizen. If needed you can also get gold loan on these gold bonds just like loan on physical gold.
The gold monetization scheme was launched by Prime Minister Narendra Modi in November 2015 with an intention to divert tonnes of gold from Indian households into banks.
The advantage of buying SGB is that you pay only for the gold you purchase and not for any additional making charges which you normally pay when buying gold jewellery or gold coins as an investment. Further, these making charges are simply not considered when selling gold jewellery or gold coins resulting in a loss. Investing in SGB also eliminates gold storage risk and the cost (bank locker fees) associated with it.
Sovereign Gold Bonds gives its investors a fixed interest of 2.50% per annum which is directly credited to their bank account after every 6 months. The maturity period of SGB is 8 years though early exit is allowed only after 5 years from the bond issue date. If the SGB is held by you in your demand account, it can be traded as any other stock on the exchange.
The subscription or redemption value of a Sovereign Gold Bond is fixed by calculating simple average of the closing price of gold (999 purity) of the last 3 business days published by India Bullion and Jewelers Association Limited.
Tax is not directly deducted at source from the Sovereign Gold Bond returns but it is the responsibility of the bond holder to calculate and pay appropriate taxes while filing his/her annual financial returns.