Should you buy Sovereign Gold Bonds?

Should you buy Sovereign Gold Bonds? Today I will not answer this – you should tell me your views, after going through the post. We ran Ask Readers series in 2011-12 – today I am reviving this. Let’s see if you can learn something new by discussing & there’s a chance that you may win something by commenting. Comment & Win Contest will be back in August – rules are same top commentator & best commentator will win a price every month. So keep asking questions & replying. (July & August comments will be combined to choose winner)

Sovereign Gold Bonds

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Sovereign Gold Bond’s note from BSE India website

Sovereign Gold Bonds are government securities issued by Reserve Bank of India on behalf of the Government of India. They are denominated in grams of gold and can be purchased instead of physical gold.

Investors can buy these bonds through BSE at issue price when RBI announces a fresh sale or they can purchase it immediately through BSE at current price like any other security.

Investors can redeem these bonds for cash upon maturity of the bonds or can sell it on BSE at current prices.

Key Features

  • The bonds bear interest at the rate of 2.75 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
  • The bonds will be available both in demat and paper form.
  • The tenor of the bond is for a minimum of 8 years with option to exit in 5th, 6th and 7th years.
  • The bonds will carry sovereign guarantee both on the capital invested and the interest.
  • The bonds can be used as collateral for loans.
  • No STT or Capital Gains Tax (as per Government of India guidelines)

Advantages of Sovereign Gold Bonds

  •           Superior alternative to holding gold in physical form.
  • Risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest.

  • No issues like making charges and purity in the case of gold in jewellery form.

  • Held in the books of the RBI or in demat form  eliminating risk  of loss of scrip  etc.

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Why Gold Bond Fund is Success but Gold Monetisation Scheme a Failure

The Government of India had launched the Sovereign Gold Bond Fund. It is a scheme where you can buy gold based securities which act as a substitute for investment in physical gold. They are denominated in grams of gold. The rate of interest is pegged at 2.75 percent per annum payable twice a year on the initial value of investment. People found merit in it as you are investing in gold and at the same there are no issues of storage and security. The securities can be traded as well. Redemption of principal and interest amounts is in the form of cash based on the average of gold price of the previous week of the redemption. In the first  set of the gold bond fund issue, people invested over Rs. 240 crores making it a success.

The Gold Monetization scheme on the other hand targets to utilize the existing gold lying in households, temples and trusts. The government wants the customer to get the gold that he/she owns, get it assessed from a recognised centre and then melt it and give to the bank. In turn, the customer will get a certificate. At the time of redemption, the value of the gold will be returned with interest in monetary terms. The concept is good on paper as there are about 20,000 tonnes of gold in India that is unused. Even if a percentage of that gold is mobilized, the import bill can be reduced significantly. But gold has a lot of emotional value in India. It is not easy for a person to give away inherited gold to be melted and converted to paper. There is a lot of sentimental value attached. The interest rate that the banks planned to give was around 1% which is too low. Many people would rather store the gold than earn such low returns. In many cases, people have just got the gold from the previous generations and there is no proof of ownership. They might get scared to go to the government agencies and declare the gold in fear of being scrutinized, questioned and then getting into taxation issues and decide not to join the gold monetisation scheme. The Government then proposed and increased rate of 2% -2.5% which could provide a boost to investments. We will have to wait for the results.

Till December 1, 2015, only 1 kg of gold was deposited in this scheme which is not a great start.

The features of the gold bond fund and the gold monetisation scheme are quite different. The gold monetisation scheme is not customer oriented and therefore cannot be called successful like the gold fund scheme.

This post is written by Vidya

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So what’s your view about Sovereign Gold Bonds?

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Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.


  1. I have few observations so far on Sovereign Gold Bond Scheme:
    1. Exit option only after 5 years is bottleneck for this bond scheme.
    2. Also the interest earned semi-annually would add up to the bracket of Income earned from other source and will be tax prevailing tax bracket. So in case of individual in 30% tax bracket effective return would only be 1.9% (2.75%*0.691).
    3. Individual cannot time the investment; he is at the mercy of RBI to issue next tranche of investment series.
    Considering the above issues, Gold Mutual Funds (FOF) are more investor friendly in in terms of ease, flexiblity, better returns and apparent investment options as it ticks all the above check-points for me.

  2. Hi, nice article.
    When compared with Gold ETF, and Gold Mutual Funds i see advantages here as it can be redeemed at any point of time and moreover after 1 year no tax applicable.

    So could you please provide a comparison of Gold Soverign bond / Gold ETF / Gold Mutual Funds etc in your next article that will definitely help readers to choose the option.

  3. The sovereign gold bond scheme, which was launched in 2015, is basically government securities denominated in grams of gold. Sovereign gold bonds come with a maturity period of 8 years, with an exit option from the fifth year. Sovereign gold bonds are also traded on stock exchanges within a fortnight of issuance, offering an early exit option for investors though liquidity is poor here.

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