Lesson 2 of 3 · 7 min
Sovereign Gold Bonds, and why they stopped
A bond measured in grams of gold that paid interest on top of the metal — plus the tax rule at maturity, and the honest position on buying one today.
A Sovereign Gold Bond is not gold. It is a bond, issued by the Reserve Bank of India on behalf of the Government of India, whose value is measured in grams. Buy a bond worth two grams and the government owes you whatever two grams are worth on the day it matures.
There is no metal in a locker, no purity to assess, no making charge. The gold price does the same thing to your holding that it would do to a coin — it just does it on paper.
| Question | A gold coin in a locker | A Sovereign Gold Bond |
|---|---|---|
| What moves with the gold price | The whole holding | The whole holding |
| Anything paid on top of that | Nothing | Interest at a rate set at issue, paid half-yearly on the amount you originally put in |
| Cost of holding it | Locker rent, and the risk of keeping it at home | None |
| Purity | Assessed again every time you sell | Not a question that arises |
| Term | Indefinite | Eight years, with an exit option from the fifth year on interest payment dates |
The tax treatment is the second reason these bonds were unusual, and it is worth understanding even now. The interest is taxable, added to your income and charged at your own income tax slab rate.
The capital gain on redemption at maturity is exempt for an individual holder — the growth in the gold price over eight years is not taxed at all. Sell on the exchange before maturity instead and that exemption does not apply; ordinary capital gains rules take over.
Quick check
You hold a Sovereign Gold Bond and the gold price does not move for a year. What have you earned?
Check yourself
1 / 3
Kabir asks
What do you actually own when you hold a Sovereign Gold Bond?
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