Sovereign Gold Bonds (SGBs) are government-backed securities that allow investors to invest in gold in the form of bonds. Issued by the Reserve Bank of India (RBI) on behalf of the government, SGBs offer an alternative to purchasing physical gold. SGBs not only provide an opportunity to invest in gold but also offer interest payments, making them an attractive option for those looking to diversify their portfolio. The tenure of a Sovereign Gold Bond (SGB) is eight years, but investors can redeem them early after five years
Benefits of using Sovereign Gold Bonds as collateral
- Retain ownership of gold: Allows borrowers to leverage their gold holdings without selling them.
- Access to liquidity: Provides a way to raise funds while keeping the investment intact.
- Eligible for loans: SGBs can be pledged to secure loans from banks and NBFCs.
- Competitive interest rates: Loans against SGBs may come with attractive interest rates, depending on the lender.
- Low-risk collateral: Being government-backed, SGBs are considered a secure form of collateral.
- Higher loan eligibility: The secure nature of SGBs may result in better loan terms and higher eligible amounts.
- Continued interest earnings: Investors continue to earn the fixed annual interest (currently 2.5%) on SGBs even during the loan tenure.
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How to use Sovereign Gold Bonds as collateral for loans
To use Sovereign Gold Bonds (SGBs) as collateral, an individual must first pledge the bonds with a financial institution. The process typically begins by approaching a bank or a lending institution that accepts SGBs as collateral. After submitting the necessary documents, including proof of ownership of the bonds, the lender will evaluate the value of the bonds based on their market price. The loan is then sanctioned based on the value of the pledged SGBs, subject to the Loan-to-Value (LTV) ratio. The pledged SGBs remain with the lender until the loan is repaid, at which point they are returned to the borrower.
Loan-to-value ratio (LTV) for SGBs
The Loan-to-Value (LTV) ratio for Sovereign Gold Bonds is upto 75%, depending on the lender's policies. This means that if the market value of the pledged SGBs is ₹1,00,000, the borrower may be eligible to receive a loan amount of upto ₹75,000. The LTV ratio is determined by the current gold prices and the terms set by the financial institution, and it can vary from one lender to another. A higher LTV ratio allows for more loan value but may come with higher interest rates or stricter terms.
Step-by-step guide to pledge SGBs
Choose a lender: Start by identifying a bank or financial institution that accepts Sovereign Gold Bonds as collateral for loans.
Documentation: Gather the necessary documents, including proof of ownership of the SGBs, identity proof, address proof, and income details (if required).
Submit SGBs: Visit the bank and submit the SGBs along with the documents. The bank may require you to sign an agreement stating that the SGBs are being pledged.
Assessment: The lender will assess the market value of your SGBs and determine the loan eligibility based on the LTV ratio.
Loan disbursement: After approval, the loan is disbursed to your account, and the pledged SGBs are held by the bank until repayment.
Repayment and release: Once the loan is repaid in full, the bank will release the pledged SGBs back to the borrower.
Comparison of SGBs with other collateral options
| Collateral Option | Security Type | Interest Rate | Loan-to-Value Ratio | Liquidity | Government Backing |
| SGBs | Gold-backed | Fixed Interest | Upto 75% | Moderate | Yes |
| Fixed Deposit (FD) | Deposit-based | Varies by bank | 80%-90% | High | Yes |
| Real Estate | Property-backed | Varies by lender | 50%-75% | Low | Yes |
| Shares | Market-based | Varies | Upto 50%% | High | No |
SGBs are more stable compared to shares and fixed deposits in terms of price volatility, but they typically offer lower liquidity than shares or FDs.
Interest and tax implications of SGBs
Here are the current interest rates and tax implications-
Interest rates
The current interest rate for SGB is 2.50% per annum on your initial investment. Interest is paid semi-annually for eight years, up until maturity. The interest will be directly credited to the account you provided during the investment process. Returns are typically linked to the current market price of gold.
Tax implications of SGBs:
Interest Income:
The interest you earn from your SGB investment is considered taxable income. This means you'll need to include it in your annual tax return and pay taxes on it according to your income tax slab.
Capital Gains Tax:
Long-Term Capital Gains:If you hold your SGBs for more than three years and then sell them, the profit you make is considered a long-term capital gain. However, the Indian government has exempted long-term capital gains tax on the redemption of SGBs. This means you won't have to pay any tax on the profit you make from selling your SGBs after holding them for more than three years.
Conclusion
Sovereign Gold Bonds provide a unique opportunity to invest in gold while earning interest. Using them as collateral for loans allows individuals to access funds without parting with their investment. The benefits of low-risk, government-backed security, and the potential for tax savings make SGBs an attractive option. However, it’s important to evaluate the Loan-to-Value ratio and compare SGBs with other collateral options based on your liquidity needs and loan requirements.
