Sovereign Gold Bonds on Zerodha

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are issued by the Reserve Bank of India on behalf of the Government of India. SGBs offer investors exposure to gold price returns plus a fixed annual interest of 2.5% per annum on the issue price, without the need to hold physical gold. Zerodha provides access to SGB subscriptions during primary issue windows and to secondary market SGB trading through Kite.

The SGB scheme was launched in November 2015 as part of the Government of India’s Gold Monetisation Scheme, aimed at reducing physical gold demand and mobilising idle gold holdings.

Key features of SGBs

Regulatory framework

RBI issuance framework

RBI issues SGBs under the Government Securities Act, 2006. Each tranche is announced by RBI through a press release specifying the subscription window, issue price, and series name (e.g., SGB 2023-24 Series I). SGBs are listed on NSE and BSE for secondary market trading.

As of the 2023-24 budget, the Government of India has significantly reduced or paused new SGB tranches, citing the fiscal cost of the 2.5% guaranteed interest plus the capital appreciation component. Investors should verify whether new primary issuances are available at the time of interest.

SEBI framework for secondary trading

Once issued, SGBs are SEBI-regulated securities listed on NSE and BSE. Exchange-traded SGBs can be bought and sold like any listed bond through Kite.

Primary subscription via Zerodha

During RBI-announced subscription windows, Zerodha enables SGB applications through Kite or the Coin platform. The process:

1. Investor navigates to the SGB subscription section on Kite during the open subscription window.
2. Investor specifies the quantity (in grams), minimum 1 gram.
3. Payment is made from the linked bank account.
4. RBI allots SGBs at the fixed issue price. Online subscribers receive a Rs 50 per gram discount.
5. SGB units (bond certificates) are credited to the investor’s demat account at CDSL on the allotment date.

Zerodha does not charge brokerage on primary SGB subscriptions. The Rs 50 discount is credited by the government directly through the lower issue price.

Secondary market trading on Kite

SGBs from previous tranches are listed and tradeable on NSE and BSE. Investors who wish to buy SGBs without waiting for a new primary issue, or who wish to sell their SGB holdings before the 8-year maturity or 5-year early redemption window, can transact in the secondary market through Kite.

Secondary market SGB prices reflect:

• Current gold price (IBMA spot price).
• Accrued interest component.
• Market liquidity premium or discount.

SGB secondary market liquidity is typically low. Bid-ask spreads can be wide, sometimes 1% to 3% of the bond value. Large sell orders may not find buyers at desired prices, particularly for older SGB series with fewer units in circulation.

Brokerage on secondary market SGB transactions:

Interest on SGBs

SGBs pay 2.5% interest per annum on the nominal value (issue price), not on the current market price. Interest is paid semi-annually directly to the bank account registered with the demat account. This 2.5% is taxable as “Income from Other Sources” at the investor’s applicable slab rate. TDS does not apply to SGB interest for resident investors.

Early redemption and maturity

Maturity redemption (8 years)

At the end of the 8-year tenure, SGBs are redeemed by RBI at the simple average of the closing gold price (IBMA published rates) for the preceding three business days. Maturity redemption proceeds are credited to the investor’s bank account automatically. No capital gains tax arises on redemption at maturity for resident individual investors, Section 47(viic) of the Income Tax Act explicitly exempts capital gains on SGB redemption by an individual investor.

Early exit (5th, 6th, and 7th year)

RBI allows premature redemption from the 5th year onwards, on interest payment dates. Early redemption also enjoys capital gains tax exemption for individuals under Section 47(viic).

Secondary market sale

Selling SGBs in the secondary market before the 5-year window does not qualify for the capital gains tax exemption. Gains on secondary market SGB sales are taxed as capital gains:

• Short-term (held less than 36 months from purchase): taxed at slab rate.
• Long-term (held 36 months or more): taxed at 20% with indexation.

SGB vs physical gold vs gold ETF

Gold ETFs trade daily on exchanges and provide liquid gold price exposure without the 2.5% interest or the capital gains tax exemption at maturity.

Pledging SGBs as collateral

SGBs can be pledged as collateral for bank loans and NBFC financing. RBI has explicitly recognised SGBs as eligible collateral. On Zerodha, SGBs held in the demat account can be pledged through the pledge and collateral margin mechanism to generate margin for trading, subject to applicable haircut determined by Zerodha’s RMS.

References

1. RBI, Sovereign Gold Bond Scheme 2015, Master Direction.
2. Government Securities Act, 2006.
3. Income Tax Act, 1961, Section 47(viic), Capital gains exemption for SGB maturity redemption.
4. SEBI, Listed securities framework for SGBs.
5. RBI Press Releases, SGB issuance calendar (quarterly).
6. Income Tax Act, 1961, Section 56, Interest on SGBs as income from other sources.