All You Need To Know About Buying Sovereign Gold Bonds From Secondary Market

Sovereign Gold Bonds are one of the most popular instruments to invest in gold in paper form.

The long term nature of the bonds, as well as the additional interest rate offered on these bonds ensure that not only does this give a higher rate of return to investors, but that they are suitable for a wide range of people.

In the current financial year there have been just a couple of new issues of these bonds and in such a situation those looking for an exposure to these bonds can consider the secondary market route. This will, however, give rise to specific conditions that the investor needs to know about and these are explained here.

If you are looking to invest in these bonds in the secondary market, then the process is similar to what is done for a share purchase.

The SGBs are listed on the stock exchanges, so they can be bought through your trading account and they will be credited to your Demat account. Just like a normal equity trade, you can buy the SGB from other investors who have put their holding for sale.

This gives rise to two important factors. One is the liquidity aspect and it has been witnessed that different issues that have hit the market over the years have varying amounts of liquidity. So, choosing the issue that you want, based on the time remaining till maturity and the quantum of investment, will need to go hand in hand with the liquidity in the issue. The other point is the price at which these are traded in the market. It has been seen that issues that are maturing in the next one or two years can often be at a slight premium to the days gold price, while those that have a maturity several years away are usually at a discount.

The purchase of the SGB through the secondary market will lead to the bonds coming into the Demat account of the investor and they will become the holder of the bonds.

One factor that is vital to understand here is the interest that is earned on the bonds. Most of the past issues have a 2.5% interest that is paid out twice a year. However, the key point is that the interest is calculated on the issue price and not the current price or the price at which the bonds were bought in the secondary market.

This means going back to see what was the original issue price of the bond and then the 2.5% has to be calculated based on the investment made at this price.

The taxation aspect has a big impact on the final returns that are earned on the instrument. The interest earned on the bonds are taxable in the hands of the investor. 

There is a good chance that the investor also earns capital gains on the investment, as the gold price might increase over the years till the time of maturity of the bonds. The tax rules state that redemption of the bonds at the time of maturity will not result in any capital gains for the investor. This can be interpreted to mean that any holder who keeps the bonds till maturity will not have to pay capital gains on the rise in value due to price. This will also cover those who have bought the bonds from the secondary market.

So, the way in which the tax benefit can be taken is to ensure that the bonds are held till maturity. If they are sold before maturity in the secondary market, then the change in the value will give rise to capital gains tax.

Investors who want an exposure to gold can use the secondary market route to buy these bonds in the absence of new issues. There is a wide choice available for them when it comes to options, because all the issues that have come till now are listed and this enables them to match the time period of their investment. Bonds bought at a discount can build in an additional level of safety on the returns front. The rise in the price of gold will determine the kind of returns that are earned, but an exposure in the portfolio through this instrument is a sound move.

Arnav Pandya is founder Moneyeduschool