Should you invest in new Sovereign Gold Bond issue or buy it on the exchange?

I intend to invest in government gold bonds. Please suggest whether I should buy them in a new edition or buy them on the secondary market. Please also share the advantages and disadvantages of buying the SGB from a new edition or from the secondary market.

— Dharamveer

If you are planning to invest in government gold bonds, you have two options to choose from. You could either apply for a reissue or buy them on a trading platform on the secondary market as well. What are the differences between these two options?

Let’s understand them.

First; If you would like to purchase from an original edition, these may not always be available. Government gold bonds are issued in tranches and an issue is typically open one week per month. So you need to figure out when the next tranche is coming, and then be ready to invest in it. However, if you are in a hurry and ready to buy on a trading platform on the secondary bond market, you can do it every day. However, please remember that you must be satisfied with the quantities offered. They may not be the amounts you are looking for. Also, the maturity dates for the plots of land for sale on the secondary market can vary widely. Keep in mind that you may get a very good deal if you invest in the secondary market as there may be distress sales with some of the old/existing SGB holders. Even if you plan to hold your investment to maturity, that’s fine. Otherwise, if you want liquidity at all times, be prepared that if you decide to sell your SGB holding on the secondary market, you may have to be prepared to take a discount and sometimes wait a few days beforehand Buyer shows up. However, both options require you to have a Demat account. Also, it’s important to know that tax benefits on government gold bonds accrue only if you hold your bonds to maturity.

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If you sell your interest before maturity, taxation depends on the duration of your interest. If you’ve held your bonds for less than three years, you must be prepared to pay taxes at the prevailing rates on the gains you make. However, if you sold your bonds after holding them for at least three years, you would be taxed at a lower rate of 20% on gains, even after the indexation benefit has been applied. But of course, if you wait until maturity, the profit you made is completely tax-exempt. If you consider all of the above factors, you can proceed to buy government gold bonds in the secondary market. However, quantity and prices are not under your control and you must accept whatever the market offers.

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(Question answered by Rajiv Bajaj, Chairman & MD, Bajaj Capital Ltd.)

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