Are Sovereign Gold Bonds a Wise Investment Choice for Senior Citizens?

During the retirement stage, retirees just aim to support themselves with money from sources they established when they were young. This explains the growing trend of investing in sovereign gold bonds (SGBs). It is considered to be favourable for those who are looking for pension plans that give guaranteed regular income and come with little capital risk. SGBs have fared well over the last eight years, demonstrating their ability to provide both stable income and capital appreciation. Let’s take a detailed look at their performance and see whether they can be considered for your retirement if you are making a pension plan for the future:

Who is eligible? 

Only resident individuals, Hindu Undivided Families, trusts, universities, and charitable institutions may purchase SGBs, with a maximum of 4 kg for individuals and HUFs and 20 kg for others. The limits are for the fiscal year.

How can I invest in SGB?

SGBs can be purchased either online through your demat account or offline. When you learn how to invest in gold online with SGB, you will learn one is eligible to get ₹50 discount if the transaction is done online. You can buy it online in both demat and certificate formats. It can only be purchased through licenced selling agencies.

Tenure of SGB

The term is for eight years from the date of issue. Interest is paid on the issue price every six months. This interest is deposited into your bank account as cash. Interest income is taxed at the marginal rate, i.e. individual slab rates. However, TDS is not deducted.

Taxation on SGBs

The interest earned from SGBs is taxed based on the investor’s income bracket. Individuals, Hindu Undivided Families (HUFs), trusts, and similar institutions are free from paying capital gains tax at maturity.

How is the cost of an SGB issue determined? 

The pricing is based on the latest three days’ average price quotes from IBJA (Indian Bullion & Jewellers Association Limited). The price at redemption is established using a similar approach.

What works in the favour of SGBs?

Average yearly return: SGBs have yielded an average of 13.7% per year over the last eight years. This includes the guaranteed 2.5% interest income as well as capital appreciation based on variations in gold prices.

Capital appreciation: In recent years, the value of gold has risen, greatly contributing to the capital appreciation of sovereign gold bonds. For example, the original issuance of SGBs in 2015 resulted in a significant absolute price gain of almost 128.5 percent by November 2023.

Comparison with other options: SGBs have outperformed bank fixed deposits and provided generally consistent returns despite market volatility. This makes them an especially lucrative option for risk-averse seniors seeking consistent income and long-term value.

There is no concern about purity: Some sort of impurities are always present when purchasing actual gold. When you are learning how to invest in gold online, you will learn there is no physical gold involved in a Sovereign Gold Bond; instead, the Reserve Bank of India and the Government of India agree to honour the gold price upon redemption.

No tracking error: Gold ETFs and Gold Funds attempt to match the returns of real gold, but due to expense ratios and fund inflows and outflows, they produce slightly lower returns. There is no such issue with SGBs.

Storage expenses: There are no storage costs unless it is held in demat mode, in which case annual maintenance charges apply. It’s zero for physical certificates.

Is it advisable for senior persons to invest in SGB?

Senior citizens are motivated to invest in SGBs for the following reasons:

Government guarantee: SGBs are backed by the Government of India, ensuring little default risk.

Potential for capital appreciation: Because gold prices have a history of rising over time, SGBs provide the opportunity for profits in addition to the guaranteed interest.

Tax benefits: While interest income is taxable, the tax-free nature of capital gains at maturity makes SGBs appealing to senior residents, particularly those that comes in lower tax bands.

Hedge against inflation: Gold has a long history of functioning as an inflation hedge, potentially maintaining investment value. However, senior individuals should also examine the risks of investing in SGBs. Allocating capital to the glittering yellow metal that captivates investors is not always easy.

Reduced promised returns: When you learn how to invest in gold online, you wil read that the 2.5% interest rate may not be as enticing as other guaranteed programmes that provide larger fixed rates.

Extended lock-in term: The eight-year tenure places significant restrictions on accessing invested funds for an extended period.

Vulnerability to gold price fluctuations: Short-term drops in gold prices might cause temporary paper losses.

The decision for senior individuals to invest in SGBs as part of their pension plan is based on their individual circumstances and risk tolerance. One needs to understand that past performance does not guarantee future results. The volatility of gold prices and market conditions increases the probability of fluctuations. Furthermore, tax considerations come into play. Although capital gains are tax-free at maturity, interest income is taxed based on the individual’s income slab.

Should SGBs be included in Senior citizens’ pension plans?

The decision to invest in SGBs or guaranteed schemes is influenced by a number of factors. Evaluating these aspects is critical, and individuals should thoroughly examine them before deciding which choice is likely to generate higher returns in the short, medium, and long term. Consider investing in SGBs if you have a longer investment horizon and can handle swings in gold prices.

Bottom line

For a well-rounded pension plan, diversify your investment portfolio by including both guaranteed schemes and SGBs that correspond to your risk tolerance and financial goals. Making sound financial decisions requires taking into account your own circumstances and risk tolerance. If you are unsure about the benefits and drawbacks of various investment strategies, visiting a personal advisor can be extremely helpful in offering expert advice.