How Sovereign Gold Bond SGB Scheme Works ?

How Sovereign Gold Bond (SGB) Scheme works?

This is best understood with the help of an example.

  1. You purchase 50 units of Sovereign gold bonds (or 50 SGBs). Each SGB unit is equivalent to 1 gm of gold.
  2. You get interest on the total purchase amount.
  3. At the time of maturity/redemption, you get the prevailing price of 50 grams of gold.

For instance, if you bought 50 units at Rs 4,000 per gram (total investment of Rs 2 lacs) and the prevailing price at the time of redemption is Rs 6,000 per gram, you will get back Rs 3 lacs. Alternatively, if the price prevailing at the time of redemption is Rs 3,000 per gram, you will get back Rs 1.5 lacs.

In addition, you earn an interest income of 2.5% per annum. Interest will be calculated on your investment value (and not on the prevailing price of gold). In this case, you will get Rs 2,500 every six months until bond maturity.

Important Features of Sovereign Gold Bond Scheme (2020-2021)

  1. The Minimum Subscription is 1 Bond (1 gm of Gold)
  2. The Maximum investment limit is 4 KG of gold (4,000 SGBs) per financial year.
  3. Only Resident individuals, HUFs, Trusts, Universities and Charitable Institutions.
  4. Non-resident Indians (NRIs) can’t invest in Sovereign Gold Bonds.
  5. Interest income of 2.5% p.a. The interest is paid out on a semi-annual basis.
  6. The subscription price is the simple average closing price of gold of 999 purity, published by IBJA for the last three working days (preceding the week of issuance).
  7. Your investment will be redeemed at the prevailing price of gold. You will not get back physical gold.
  8. The price for redemption/maturity shall be calculated in the same manner.
  9. Sovereign Gold Bonds are backed by Government guarantee. Hence, there is no credit risk.
  10. However, there is price risk. The value of your investment will change with the price of gold.
  11. The bonds will be listed on BSE and NSE. Hence, you can exit before maturity in the secondary market too.
  12. You can take loans against these gold bonds (just like physical gold and jewellery)
  13. You can apply for the SGBs from your brokerage account.

How can I exit or redeem my Sovereign Gold Bond investments?

Sovereign Gold Bonds mature in 8 years. There is also an option to redeem gold bonds with the Reserve Bank after 5 years on interest payment dates. Note that interest payment is semi-annual.

Thus, you can redeem your investment (if you wish) with the Reserve Bank after 5 years at every 6 months interval (5 years, 5.5 years, 6 years, 6.5 years, 7 years, 7.5 years and 8 years from the date of issuance).

At the time of maturity, you will get back the value of your investment as per the prevailing price of gold. Thus, you carry the price risk.

Let’s say you bought 10 units (10 grams) of SGB at Rs 4,500 per gram. At the time of redemption, the gold price is Rs 6,000 per gram. You will get back Rs 60,000 (10 X 6,000).

On the other hand, if the price at the time of redemption/maturity is Rs 3,500 per gram, you will get back Rs 35,000 (10X 3,500).