Sovereign Gold Bonds (SGBs) have become a popular choice for investors in India due to their government-backed security and fixed annual interest rate. Introduced in 2015, SGBs provide an alternative to holding physical gold while offering the potential for both capital appreciation and interest earnings. However, for Non-Resident Indians (NRIs), the rules around NRI Sovereign Gold Bonds investment have certain restrictions, especially after changes in the law. You can also consider exploring other investment opportunities for NRIs in India to diversify your portfolio. This blog will explore the rules and regulations around NRIs and Sovereign Gold Bonds, along with alternative gold investment options that can be pursued by NRIs.
Further, in Budget 2025, the finance ministry announced the discontinuation of the Sovereign Gold Bond (SGB) scheme. This decision comes amidst the continuous rise in domestic gold prices. The government has cited the high cost of borrowing associated with the SGB instrument as the reason for discontinuing the scheme. NRIs will need to consider alternative investment avenues for gold exposure, given the regulatory changes and market dynamics.
What Are Sovereign Gold Bonds?
Sovereign Gold Bonds are government securities denominated in grams of gold. Issued by the Reserve Bank of India (RBI) on behalf of the Government of India, these bonds are designed to offer investors a safe investment option that mirrors the price of gold without the need for physical storage. SGBs have a tenure of 8 years and offer a fixed annual interest rate of 2.5%, payable semi-annually.
These bonds are attractive for those looking to invest in gold without the hassle of buying and storing physical gold, and they come with tax advantages. For example, the interest earned on SGBs is taxable, but the capital gains from the sale of the bonds are exempt from tax if held until maturity.
Current Eligibility Criteria
SGBs are available to:
- Resident Indian individuals
- Hindu Undivided Families (HUFs)
- Trusts
- Universities
- Charitable institutions
The minimum investment is just 1 gram of gold, with a maximum limit of 4 kilograms for individuals and HUFs, and 20 kilograms for trusts and institutions. Importantly, these investments must be made by resident Indians. But what about NRIs?
Can NRIs Invest in Sovereign Gold Bonds?
According to the Foreign Exchange Management Act (FEMA), NRIs cannot directly invest in Sovereign Gold Bonds. The government’s restrictions prevent NRIs from purchasing new bonds. However, if an NRI was a resident Indian at the time of investment, they can retain their bonds until maturity or opt for early redemption, even after their residential status changes.
What Happens When an NRI Holds Sovereign Gold Bonds?
- Retention of Existing Bonds: If an NRI had purchased SGBs when they were a resident Indian, they can hold onto those bonds. They are allowed to receive interest payments and capital gains, but they must comply with NRI tax laws.
- Redemption and Tax Implications: The redemption of SGBs is subject to NRI tax regulations, including taxation on the interest earned and any capital gains upon redemption.
Inheritance and Nomination Rights
NRIs can nominate a beneficiary for their SGBs. If the bondholder passes away, the nominee will inherit the bonds and can hold them until maturity. However, the nominee must follow the same guidelines regarding the retention and redemption of the bonds as the original holder.
What Happens When an NRI’s Status Changes?
When an individual’s status changes from a resident to an NRI, the rules for holding SGBs remain unchanged for existing investments. NRIs are allowed to retain these bonds, and the bond continues to accrue interest until its maturity, subject to applicable tax laws.
However, an NRI can no longer purchase new bonds after changing their status. Additionally, any funds received from these bonds, such as interest or capital gains, must be routed through Indian accounts, like NRO (Non-Resident Ordinary) or NRE (Non-Resident External) accounts.
Alternative Investment Options for NRIs
While NRIs cannot directly invest in Sovereign Gold Bonds, there are several alternative gold investment options that offer similar benefits.
- Gold ETFs (Exchange-Traded Funds):
- How It Works: Gold ETFs are listed on Indian stock exchanges and allow NRIs to invest in gold by purchasing units of the fund. Each unit of the ETF represents one gram of gold.
- Benefits: Gold ETFs provide liquidity, easy trading, and the convenience of digital transactions. NRIs can invest in them through their NRE/NRO accounts, and the units are stored electronically, eliminating storage issues.
- Gold Mutual Funds:
- How It Works: These funds invest in gold and gold-related assets. While Gold ETFs directly invest in physical gold, Gold Mutual Funds may also invest in companies involved in gold mining and refining.
- Benefits: This option offers diversification in the gold investment portfolio. NRIs can invest through Indian fund houses or through brokers and banks.
- Digital Gold:
- How It Works: Digital Gold allows investors to purchase gold in small denominations as low as gold for Rs. 1. The gold is stored by authorized issuers, and investors can convert it into physical gold if needed.
- Benefits: Digital Gold provides flexibility, making it a suitable option for NRIs who want to invest in gold without worrying about storage or purity.
- Physical Gold:
- How It Works: NRIs can purchase physical gold in the form of jewelry, coins, or bars. While this remains a culturally significant form of investment, it comes with the challenges of storing and insuring the gold.
- Benefits: Direct ownership of gold, which can be physically stored, but it requires care in managing storage and ensuring the purity and security of the gold.
Conclusion
While NRIs cannot directly invest in Sovereign Gold Bonds anymore, the NRI Sovereign Gold Bonds investment can still be retained and enjoyed until maturity. Each of these alternatives has its own set of benefits and considerations regarding liquidity, storage, and taxation.
For NRIs who already hold SGBs, their existing investments remain secure, and they can continue enjoying the benefits of the bonds until maturity. However, it is essential for NRIs to stay compliant with tax and regulatory requirements to ensure smooth management of their investments. To help you navigate these complexities, it is important to understand the Inheritance Laws and Tax Implications for NRIs in India, which can further guide you in managing your investments effectively.
Choosing the right gold investment option depends on factors such as storage capacity, liquidity needs, and the level of risk the investor is willing to take. Whether through modern financial instruments like ETFs or the traditional route of physical gold, NRIs can successfully build a diversified gold portfolio that fits their financial goals and investment preferences.
If you need assistance with understanding your gold investment options or need expert advice on real estate, legal, or tax services in India, Brivan Consultants is here to guide you through the process and help you make informed decisions. Reach out to us for more personalized support.
Frequently Asked Questions (FAQs)
Q1. Are Non-Resident Indians (NRIs) eligible to invest in Sovereign Gold Bonds?
No, currently NRIs are not allowed to make new investments in Sovereign Gold Bonds as per the Foreign Exchange Management Act (FEMA) regulations.
Q2. What happens to existing Sovereign Gold Bond investments if an investor’s status changes from resident to NRI?
If a resident investor becomes an NRI, they can continue to hold their existing Sovereign Gold Bonds until maturity or opt for early redemption. However, they cannot make new SGB investments.
Q3. What are some alternative gold investment options available to NRIs?
NRIs can invest in Gold ETFs, gold mutual funds, digital gold, and physical gold (jewelry, coins, and bars) as alternatives to Sovereign Gold Bonds.
Q4. Can NRIs inherit or be nominated for Sovereign Gold Bonds?
Yes, NRIs can be nominees for SGBs. If an NRI becomes a nominee, they must hold the bonds until maturity, follow standard exit procedures, and accept non-repatriation of interest and maturity amounts.
Q5. What are the key compliance requirements for NRIs holding Sovereign Gold Bonds?
NRI holders of SGBs must adhere to NRI tax regulations for income from these investments, maintain proper documentation for tax compliance, and ensure their holdings align with current FEMA guidelines.
