Sovereign Gold Bonds 2017-18 - Series II Opens Today. Here Are 5 Good Reasons To Consider It

Launched in November 2015 with the intent of discouraging gold imports and providing Indian households with a convenient and simple way to own gold, Sovereign Gold Bonds (SGB's) have had an overwhelming response until now. The government has mobilized Rs. 5,400 crores in the previous eight tranches thus far.

As the name suggests, SGB's are issued by the Government of India. They have an 8-year duration, with exit options starting from the 5th year onwards. The current issue is open from July 10th to July 14th. Here are five good reasons why gold investment aficionados should consider SGB's instead of investing into ETF's or purchasing physical gold.

Tax Efficiency
If it's investment return - and not the joy of owning gold - that's your prime motivation behind purchasing gold, you should consider that the 'real returns' earned on SGB's is likely to be higher vis a vis other gold investment avenues. First, there's no GST applicable on SGB's (unlike the 3% that's applicable on physical gold). Second, if you hold the bonds until maturity, you'll be exempted from capital gains tax. For ETF's and physical gold, your profits would be subject to long term capital gains taxes. Third, there's no expense ratio applicable on SGB's - unlike Gold ETF's that have distribution and management costs of around 1% built into their NAV's, which create a drag on returns.

Security and Convenience
With SGB's, you can circumvent the hassles of storing gold and worrying about its purity and quality. Buying SGB's is equivalent to owning 999 purity gold, without having to go through the trouble of storing it in physical form. Since the bond certificates themselves are dematerialized, there's no need to worry about the theft and destruction of paper certificates, either.

Additional Return
The current tranche of SGB's provide an annual coupon of 2.50% over and above the gains arising from an increase in gold prices during the tenor of the bond. This interest is paid out on a half yearly basis on the nominal value of the bond (not the current price of gold). For instance, if you were to purchase a 100 SGB's today at the price of 2,780 (Rs. 2.78 lakhs), you would receive 1.25% of Rs. 2.78 lakhs, or Rs. 3,475 as half yearly interest. Do bear in mind that this interest is taxable at your marginal tax rate.

Liquidity
Though SGB's have a lock in period of 8 years, they are freely tradable on both BSE and NSE. This adds the vital element of liquidity that you would have had from owning physical gold or subscribing to ETF units. If the demand for gold bonds rises, your bonds may even command a slight premium over physical gold prices at your point of sale. However, do bear in mind that the clause related to tax-free capital gains does not apply to gains arising from the sale of SGB's on the stock exchange.

Loan Collateral
Just like physical gold, you'll be able to pledge your SGB's to avail loans of up to 75% Loan to Value. This provides SGB investors with an additional mechanism to raise liquidity without letting go of their bonds, in case of an emergency.

End Note: All things considered, SGB's provide investors with a secure, convenient, tax efficient and better return alternative to owning physical gold. If you're looking to fit gold into your portfolio, there's no reason why you shouldn't aim for the upper-limit ownership of 500 grams per fiscal year.