Sovereign Gold Bonds: earning interest on gold

Buying gold usually means jewellery, coins or a fund. Sovereign Gold Bonds offer another way that even pays interest. This guide explains what SGBs are and how they work.

Quick answer

Sovereign Gold Bonds (SGBs) are government securities issued by the Reserve Bank of India that track the price of gold. Instead of holding physical gold, you hold a bond whose value moves with the gold price, and you also earn a fixed rate of interest on the amount invested. SGBs are a way to invest in gold without storage worries.

Key takeaways

• SGBs are government bonds that track the price of gold.
• They are issued by the RBI on behalf of the government.
• You earn interest on top of gold price movement.
• There is no physical gold to store or insure.
• They have a fixed maturity, usually several years.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds, or SGBs, are government securities linked to the price of gold. They are issued by the Reserve Bank of India on behalf of the government. Each bond is denominated in grams of gold, so its value moves with the gold price.

Instead of buying and storing physical gold, you hold a bond. When gold rises, the bond's value rises, and when gold falls, it falls. You can hold them in a demat account or in paper form.

How do SGBs work?

You buy SGBs when the government issues them, paying a price based on the current gold rate. The bonds have a fixed maturity, usually several years, at the end of which you are paid based on the gold price at that time.

A special feature is that SGBs pay a fixed rate of interest on your invested amount, on top of any change in the gold price. This interest is something physical gold and most gold funds do not offer.

How are SGBs different from a gold ETF or physical gold?

All three give exposure to gold, but they differ in key ways. Physical gold means storage and purity concerns. A gold ETF holds units that track the gold price in a demat account, with a small expense but no interest. An SGB tracks gold and also pays interest, but locks your money for a fixed term.

So SGBs stand out for paying interest and removing storage worries, in exchange for a longer holding period.

What about tax on SGBs?

The tax treatment of SGBs has specific features. The interest is generally taxable as income, while the gain from the gold price at maturity has had favourable treatment under past rules. Tax rules can change and depend on individual circumstances.

Because the tax angle can shift with each budget, you should check the current position before investing. This is knowledge about the product, not advice for your specific situation, so consult a tax professional if needed.

What are the risks of SGBs?

The main risk is the gold price itself. If gold falls, the value of your SGB falls, since it tracks the metal. The interest cushions this a little, but it does not remove the price risk.

There is also a liquidity point. SGBs have a fixed maturity, and although they can be traded on the exchange, trading volume may be thin, so selling early may not always be easy. For long-term gold exposure with interest, though, many investors find them useful. Any decision should be your own after research.

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