The Hidden Advantage of Buying Gold Sovereign Bonds in the Secondary Market
Additionally, you can start investing in gold bonds for your children’s wedding, converting them to physical gold when the time comes. Parents start storing physical gold from the birth of a child, be it a girl or a boy. Prefer gold bonds over it. Not only do gold bonds trade at a discount to physical gold, but you can buy it in installments, allowing you to stretch over an affordable period of time. Plus, you don’t have to pay extra on manufacturing costs. There will be no goods and services tax.
Another major advantage of SGBs is the tax-exempt capital gain if you keep them until maturity. SGBs expire after eight years and have a five-year lock-in period. If you want flexibility with the expiration period and avoid the deadlock, you can also buy SGBs on the secondary market.
SGBs are government guaranteed securities that the Reserve Bank of India (RBI) issues several times a year. Investors also earn an amount of interest of 2.5% per annum paid semi-annually on their initial investment.
The first issue of SGB (Series VIII for fiscal year 2021-2022) started today. The issue price was set at ??4,791 per gram with ??50 off if you buy it digitally. One gram equals one unit of gold bonds. Compare it with the physical prices of gold, which are listed at ??4,972 per gram in Ahmedabad on Friday.
Although the subscription to the primary issue has its advantages, most SGB series in the secondary market are available at much better prices compared to the current series and current gold prices. Should you buy one? You will find out soon.
Gold bonds in the secondary market
Since each SGB series is publicly traded, one can buy shares of ESB and NSE if one has a mat account. No less than 56 sets of GBS are traded in the species segment of BSE and NSE. The purchase prices of all series (as at the Friday close) are lower than the issue price of the new series. This is usually the result of sellers willing to accept a rebate in exchange for a quick exit from the instrument.
So, should you buy the series at the lowest price? Not necessarily. You need to check their liquidity, the respective issue prices and the interest component.
The liquidity factor
First of all, you should know that liquidity plays a major role in the secondary market. You can’t buy just any series. It must be sufficiently liquid to meet your demand. “If we look at the major issues traded, the average daily volume is around 5,000 grams,” says Sugandha Sachdeva, vice president – Currency and Commodity Research, Religare Broking.
We have compiled a list of the top 10 series with the highest liquidity based on their monthly average trading volume data. (see graph).
Understanding the dynamics of interests
SGB gives you 2.5% interest per annum paid twice per year. Interest is payable on the issue price of a particular series, not on your purchase price in the secondary market. So when you buy a series in the secondary market, don’t settle for the lowest trading price. Also look at issue prices. Your purchase price must be lower than the issue price.
“The selection criterion among the available tranches of gold bonds on the secondary market should be to look for a liquid series and probably at a discount to the issue price. It is convenient to buy the most traded series and the repurchase would also be much easier, without too much volume constraint, ”explains Sachdeva.
For example, the purchase price of the most liquid series, SGBAUG28V, at ??4,775 is discounted from its issue price of ??5,334 per unit. Compare it with the new series that started today. SGBAUG28V series not only offers you lower purchase price per unit, but also higher interest component. The series will mature a year earlier as well. Likewise, SGBMAY29I and SGBJUL28IV are also attractive.
SGBMAY28 may not be a good choice because the issue price here is lower than its purchase price. While you will get the units at much lower prices ( ??4,689.99 per unit) compared to the new issue at ??4,791, the 2.5% interest on your investment amount will be much less than what you would otherwise get if you subscribed to the new issue. “Buying in the secondary market can increase the overall return by offering a lower price for the new issue, as well as a higher return,” says Sachdeva.
Buying in the secondary market also gives you a tax advantage. The capital gains tax in SGBs is zero if you sell them at maturity, i.e. after eight years. This is applicable even if you buy it in the secondary market for the remaining term.
“The Income Tax Act clearly says that if you redeem gold bonds at maturity, the capital gains will remain tax-free. Thus, one can interpret that the buyer in the secondary market will get the tax-free treatment at the time of the redemption because the seller has already paid taxes to the government for the period in which he has held it, ”explains Sujit. Bangar, Founder, Taxbuddy.com.
Put simply, if you buy units of a series in the secondary market, which will mature after two years, your capital gains at maturity will still be tax-free. In the case of physical gold, you have to pay short-term capital gains tax (STCG) according to your income tax rate, while capital gains tax long term is levied at 20% with indexation. SGBs in the secondary market are less explored but offer great value if one buys a liquid series with a trading price lower than one’s own issue price and that of the new issue.
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