When the Modi government came to power in 2014, two of the popular schemes introduced were the gold bonds scheme and the gold monetization scheme. While the Gold Monetization scheme was not too popular, there has been good interest in the Gold Bonds scheme. Normally, the bonds are issued by the RBI and guaranteed by the government. This is the only form of gold that pays you interest. Also after a gap of 6 months, these gold bonds are listed and thus offer a secondary market exit too. Let us look at the Sovereign Gold Bond scheme 2018 as well as the major advantages of the sovereign gold bond scheme.
The purpose behind Sovereign Gold Bonds (SGB)
SGB belongs to the debt fund category. It not only brought down the demand for real gold, but could also track import-export of the same. There is transparency about this product as it comes under the purview of RBI. The SGB is very useful for people who are look at gold as an investment. There is no fear of theft, no holding charges and fully backed by the government of India. You don’t even have to hire a bank locker. Value of the SGB is denominated in multiples of gold grams and thus emerges as a substitute for investing in physical gold as the quantity remains the same. You can buy these SGBs through your broker, you can buy it online through net banking or you can also buy it from designated offices. Therefore, people who have a penchant for gold investments can consider sovereign gold bonds. The expense of buying or selling the SGB is nominal in comparison to physical gold.
Key Features of the Gold Bonds Scheme
Who is eligible to invest in Gold Bonds Scheme? Any Indian resident – individuals, Trusts, HUFs, Charitable Institutions and universities – can invest in SGB. You may also invest on behalf of a minor subject to maximum limits prescribed.
How are these bonds denominated? The value of the Gold bonds is assessed in multiples of gram(s) of gold, wherein the basic unit is 1 gram. The minimum initial investment is 1 gram of gold, and the upper limit is 4 kg of gold per investor (individual & HUF). Of course, trusts and universities can invest annually up to 20 kg of gold. The good thing is that the benchmark is in grams of gold and not in value terms.
Let us now turn to maturity of these bonds. The bond’s maturity period is for 8 years. However, you can choose to exit the bond from 5th year onwards (only on interest payout dates). Some banks are also willing to give a loan against these bonds.
You can pay online or by cheque / DD. Cash payments are only accepted up to Rs.20,000. There will be a service charge deduction of Rs. 50 of those who pay online. These bonds can be either held in the form of certificates or in your online demat account in electronic format.
Is it true that gold bond pay interest? Yes, that is correct. The current interest rate for SGB is 2.50% annually. They are paid twice a year on the nominal value. Returns are usually linked to the current market price of gold. Other than the interest payment of 2.5% per annum, any appreciation in the price of gold will lead to capital gains on these bonds.
Do I need to go through an elaborate KYC documentation process for SGB? Yes, KYKC is a must. You must follow the same Know-your-customer (KYC) norms when you buy physical gold. Hence, keep the KYC documents like copy of Driving License, PAN Card, Passport or Voter ID ready with you.
What are the tax implications of investing in SGBs? There is no tax deducted at source on the proceeds from sovereign gold bond redemption. You can also claim indexation benefits along with long term capital gains when you decide to transfer the bond. So its tax implications are different from that of gold ETFs. The interest is taxable like any normal FD interest in the hands of the recipient.
How can SGB be redeemed and at what price. The redemption price is decided based on the closing price of gold with 999 purity and it will be based on the average price of the last 3 days. The quantum of gold remains constant so the quantity will be multiplied by the average price to determine the redemption amount.
Some of the major advantages of Sovereign Gold Bonds include absolute safety, zero default risk, offers an additional source of income on your idle gold, indexation benefits on capital gains calculation, secondary market liquidity and also as eligible collateral.
If you are conservative and looking to leverage your gold investments, this could be the right way ahead for you.