Gold has been one of India’s most preferred investment options due to its cultural and financial relevance. When comparing various investment avenues, gold has been on an upward trajectory since 2019 or even before that.
For instance, the gold rate per gram was approximately ₹3,200 back in 2019, while today, the gold rate has steadily increased to more than ₹5,000. This steep rise indicates the growing demand for this precious metal.
As the demand for gold increases, so are the investment options too. Apart from buying physical gold, you can invest in gold in other forms, such as Gold Exchange Traded Funds (ETFs), digital gold and Sovereign Gold Bonds (SGBs).
SGBs are financial securities issued by the RBI and Buying one SGB unit carries the weight of 1 gram of gold. These investment vehicles offer attractive returns on redemption coupled with a fixed interest income at 2.50% p.a., which is paid half-yearly.
Furthermore, investing in SGBs involves a straightforward process. Usually, RBI introduces a new series of SGBs across a year. So, while you can purchase it directly from the RBI, you also have the option to buy the SGB from the secondary market.
To know more about buying SGBs from the secondary market, read on.
Before understanding the link between the Sovereign Gold Bond and the Secondary Market, you need to know about the secondary market. As mentioned already, there are two ways to purchase SGBs.
While you can get it through the primary issuance directly from the RBI, you have an indirect way to procure it. This indirect method constitutes the secondary market comprising authorised stock exchanges such as the BSE and NSE.
However, there is a contrast in prices when buying the SGB in the secondary market compared to the primary issuance. This is because the RBI fixes the SGB unit price based on the average rate of gold during the preceding week.
Note that the gold rate published by IBJA (India Bullion and Jewellers Association) is considered final by the RBI before deciding the unit price of SGB.
When purchasing SGBs from the secondary market, you can get them at discounted prices. The simple reason for this is the low trading volume in the debt market. So, when trading SGBs in the secondary market, the rates depend entirely on the demand and supply factors.
Moreover, since these instruments do not have very high liquidity, the dynamics of supply and demand play critical roles in deciding SGB rates in the secondary market. Due to all these constraints, there is a stark difference in buying the SGB in the secondary market.
When there is less demand, SGB prices decline drastically. Similarly, when trading SGBs in the secondary market, the low liquidity levels of these bonds result in discounted rates. Simply put, purchasing SGBs from the secondary market may offer units at lower rates than you had expected.
Similarly, your capital gains may be low when you plan to sell your units in the secondary market. That said, SGBs trade in the secondary market at discounted rates of 3-7% less than the actual market rate.
While buying SGBs in the secondary market offers discounted rates, it is crucial to consider the SGB market volume. That’s the reason for getting SGB units at discounted prices in the secondary market.
However, you can gain the advantage of these discounted prices by considering a few crucial points:
Consider purchasing SGBs as a long-term investment
Buy SGBs in the secondary market and invest them until maturity
Avoid selling SGB units on the stock exchange before the bond matures
Get the final SGB rate from the RBI after the bond matures when buying discounted SGBs
Avoid buying SGBs in bulk from the secondary market
Ensure not to purchase large quantities, as that may increase the demand for SGBs, with prices tending to skyrocket
Evaluate the liquidity factor of the series when buying SGB in the secondary market
Avoid investing in high-demand series, as you may not get discounted prices
While these critical points can help you purchase SGBs at discounted rates, there is another fact you need to be careful about. When planning to resell your bond in the secondary market, investing in bonds offering high liquidity options is ideal.
The Indian Government has introduced SGBs to help people invest in gold easily and cost-effectively. As such, you can enjoy tax benefits on SGBs. As the bond has a maturity period of 8 years, the capital gains after the bond redemption on maturity are not taxable.
On the contrary, premature redemption may attract tax on your capital gains. While this also applies to bonds purchased from the secondary market, understand that you are not buying a new bond on the exchange.
Here, the bond is simply transferred from the previous buyer. Hence, this transaction is not redemption but a normal transfer process. Furthermore, you get tax benefits on redemption after the bond matures, as you are the bondholder.
However, selling SGBs in the secondary market before maturity attracts tax on capital gains. If you redeem SGB units before a holding of 3 years, it qualifies as short-term capital gains. However, SGB unit redemption exceeding 3 years is referred to as long-term capital gains.
While short-term gains are taxed based on your tax slab, long-term gains are taxed at approximately 20%, coupled with indexation benefits. So, understanding these key factors on tax implications is crucial before purchasing SGBs from the secondary market.
Buying discounted SGBs on the exchange has its advantages. However, ensure that you consider SGB a long-term investment and sell the units after maturity. This way, you can reap higher benefits on the SGBs purchased from the secondary market.
To help you make an informed choice and invest in SGBs, you can understand its various facets on Bajaj Markets.
SGBs in the secondary market are available at discounted rates due to their low liquidity factor.
As the stock exchange functions based on demand and supply, it is crucial to assess the liquidity factor. Simply put, when the demand increases, you may not get a discount.
You can buy SGBs from the secondary market such as authorised stock exchanges or get them from the RBI through distribution channels like post offices and banks.
SGBs are available easily and provide a more accessible storage facility than physical gold. Moreover, the quality of gold is maintained when investing in SGBs in the secondary market or getting from the RBI.
To top it all, you can earn fixed interest income twice a year when you purchase SGBs.