Sovereign Gold Bonds are bonds with the underlying asset as gold. They are issued by the Government. An investor can buy these bonds for allocation towards gold in his or her investment portfolio. There is returns potential in the form of capital appreciation and interest receivable.
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Key Features of Sovereign Gold Bonds

• These bonds were issued by the Government to reduce the demand for physical gold in 2015. They will be open for subscription for a specific duration in each of the months from October 2018 to February 2019. Here are the periods when the next series of bonds will be available –
  • November 5 to November 9
  • December 24 to December 28
  • January 14 to January 18
  • February 4 to February 8
• The price of the bond is based on the average price of gold for the last three weeks preceding to the subscription period. 
• All Indian residents, HUFs, trusts, charitable units and Universities can purchase these bonds.
• You can purchase them from NSE, BSE, designated banks and post offices.
• You can buy bonds equivalent to a maximum quantity of 4 kgs in a financial year.

Tenure and Interest Rates
Tenure –  8 years with an exit option from the 5th year onwards. 
Interest –  2.5% per year payable semi-annually on the initial value of investment

Documentation
KYC documentation is a must. You will receive a holding certificate when you invest in these bonds.

Taxation

• Sovereign gold bonds are exempted from capital gains (LTCG) tax at the time of redemption after the 5th year.  If you sell them in the secondary market before maturity, you have to pay tax. 
• Proceeds from sale in the secondary market within three years of purchase is taxable as per your income tax slab. 
• Proceeds from sale after three years but before maturity in the secondary market is taxed at 20% with indexation.
• Interest earned on these bonds is taxable as per the income tax slab that you fall under. 
• TDS is not applicable on the bonds. It is the investor’s responsibility to pay tax if required.

Nomination and Transferability
You can appoint a nominee when you invest in these bonds. An NRI can also be a nominee.
You can transfer the bond to another person using the Instrument of Transfer.

Redemption
At the end of 8 years, the principal amount and the interest will be credited to the investor’s bank account. In case of redemption, in the 6th or 7th year, the investor should approach the institution from where the bonds were purchased before the coupon payment date assigned.

Advantages 

• Sovereign Gold bonds are issued by the Government. So they are relatively safe.
• If you want to have gold in your portfolio but are not interested in buying physical gold, these bonds are a good option.
• They are better than Gold funds and Gold ETFs as there are no management expenses and the returns are more or less guaranteed.

Disadvantages

• The rate of return is very low as compared to other assets such as Fixed deposits or Equity Mutual funds.
• These bonds have a lock-in period of 5 years and therefore are illiquid. They can be sold in the secondary market but the number of transactions is very low.

Our Analysis
If you are looking for high returns in the long run or quick short term gains, gold bonds are not the best investment option. If you want to diversify your investment portfolio and hedge against market risks, you can allocate some part of your investment to these Gold bonds. If you have a goal of safe gold accumulation for child’s marriage, you can invest in these bonds over a period of time to get a sizeable amount in the future.