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What is Sovereign Gold Bonds Interest Rate & How Its Paid?

22 Dec 2022 0 COMMENT

Introduction

One of the major attractions of investing in SGBs is the sovereign gold bond interest rate. When the government started the issue of sovereign gold bonds in 2015-16, the SGB interest rate stood at 2.75%. However, that was later reduced to 2.50% and that is the rate that has continued since. That is the added attraction of the sovereign gold bonds as the assured interest of 2.50% comes on top of any price appreciation that the investor gets linked to the price of gold.

Remember, that when you invest in sovereign gold bonds, the interest payment of 2.50% is assured by the government. However, the rate is not fixed and may vary from time to time at the discretion of the government. Currently, the gold bond scheme interest rate stands at 2.50% and that is the level it has been static at for quite some time. Here we look at how the interest rate on SGB is paid out to the investors in SGBs.

Explain in details interest rate on SGB

The interest rate is mentioned on the face of the sovereign gold bond, which current stands at 2.50%, payable semi-annually. As per the terms of the issue of sovereign gold bonds (SGB), these Bonds will bear interest at the fixed rate of 2.50% per annum on the amount of initial investment. However, this is subject to change from time to time. But how is the interest amount calculated in this case.

It depends on the amount of initial investment. For instance, the August 2022 tranche of sovereign gold bonds were issued by the government through RBI at a price of Rs5,197 per gram. Here is how the interest at 2.50% will be calculated and paid for the bonds assuming 20 grams of gold equivalent purchased.

Particulars

Amount

Price of SGB issued

Rs5,197 per gram

Discount for digital investment

Rs50 per gram

Net cost of SGB investment

Rs5,147 per gram

Units of SGBs purchased

20 grams

Value of SGB purchase (Principal Value)

Rs102,940

Interest on SGB at 2.50 % on Principal

Rs2,573.50

Amount paid half-yearly

Rs1,286.75 every 6 months

Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with principal. As shown in the above illustration, the purchase value of the SBG will be the deemed face value on which the interest will be calculated. That will not change through the holding period of the SGB.

SGB Interest rate how it is paid out

Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond. The investor is required to furnish bank account details at the time of application and the interest will only be directly credited to the bank account. A few points to note.

  • What happens to interest if the bond is sold in the secondary market? It is normally adjusted for proportionate interest and adjusted to the price while trading. There is a set process for that.
  • Is the interest taxable? Yes the interest earned on sovereign gold bonds is entirely taxable in the hands of the recipient at the peak applicable rate. That means whether the investor pays a tax rate of 20% or 30%, the tax on interest will be levied at that rate.
  • Is there TDS (tax deduction at source) in case of interest paid out on sovereign gold bonds? The RBI or the government will not deduct any TDS from the interest payment. The responsibility of paying advance tax on such interest and filing the tax returns is the responsibility of the investor only.
  • What about levels of exemption on the interest on sovereign gold bonds? The basic interest exemption limit of Rs10,000 will be applicable. That means, if you don’t have any other source of bank interest, then interest of up to Rs10,000 per year on gold bonds is fully exempt. At the current rate of 2.50% interest, that translates into an exempt investment in gold bonds of up to Rs4 lakhs per year.

Conclusion

Interest on sovereign gold bonds is the added perk of investing in SGBs. However, these are fully taxable in the hands of the investor.