Applications for Third Tranche of Sovereign Gold Bonds will be accepted from March 8, 2016 to March 14, 2016. The Bonds will be issued on March 29, 2016 . The bonds will be sold through banks, Stock Holding Corp of India Ltd and designated post offices. The gold bond scheme has been announced to give an alternative to consumers in place of physical gold. What is the Sovereign Gold Bond? How does it work
What is Sovereign Gold Bond (SGB)? Who is the issuer?
SGBs are government securities in grams of gold,issued by Reserve Bank on behalf of Government of India. Investors have to
- Buy the bonds at the issue price
- The tenure of the bond is eight years with exit option from 5th year
- The Sovereign Gold Bonds will offer an interest rate of 2.75%. The interest will be payable semi-annually on the initial value of investment. The interest is taxable. Please note that the 2.75 per cent extra is on the original invested amount and not on the changing value of your gold investment
- When the bond is redeemed , it will be at the price of gold at that time.
- On redemption of the bonds you would have to pay capital gains.
Official information is at RBI webpage RBI FAQ on Sovereign Gold Bond Scheme 2015
Example of How do these Sovereign Gold Bond work?
Say instead of buying 10 grams of gold as investment, you can buy a 10 gram gold bond. The tenure of the bond is eight years. After eight years, you redeem the bond and get whatever is the value of 10 grams of gold at that time.The difference between buying physical gold and the bonds is that you will get 2.75 per cent per annum on the investment value. Compounded over eight years, this is an extra gain of almost 25 per cent. If we assume that gold prices will rise by 5%, the bonds will yield an annualised return of 7.75% For example, if you invest Rs 26,000 in these bonds and the price of gold becomes one and a half times in eight years, you would get back Rs 42,200, which is the gold appreciation (Rs 13,400) plus an extra Rs 6,493, which is a gain of 2.75 per cent p.a. on the original Rs 26,000.
In that case, having a separate assured return of about 25 per cent over eight years is a great guarantee that you will be better off than those who just buy physical gold
Why should I buy SGB rather than physical gold? What are the benefits?
Gold bond schemes provide an alternative investment option to physical gold and offer an additional interest unlike other schemes such as gold exchange traded funds (ETFs). According to a World Bank estimates, about 20,000 tonnes of gold is lying in Indian households.
- SGB is free from issues like making charges and purity in the case of gold in jewellery form.
- The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated.
- The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption.
- The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.
- The return is 2.75% over the price of gold at the time of investment, leading to compounding benefits.
- You can gift the bonds to a relative or friend on some occasion.
- You can use these securities as collateral for loans. The loan-to-value (LTV) ratio will be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
RBI FAQ on Sovereign Gold Bond Scheme 2015
Has Sovereign Gold Bond been released earlier? If yes when
Prime Minister Narendra Modi, on November 5, had launched three ambitious schemes to reduce the physical demand for gold and fish out 20,000 tonnes of the precious metal worth USD 800 billion lying idle with households. Our article Gold Monetization Scheme discusses it in detail.
The first tranche of the sovereign gold bond were open for public subscription from November 5-20, 2015, priced at Rs 2,684 . The bonds were issued on November 26. It fetched 915.953 kg of the metal, valued at Rs 246 crore.It was less than expected since the price of gold fell between when the RBI set the price and when the bonds were open for subscription, demand was subdued. Gold price has gone down further since then and is now quoting at Rs 2,545. since the discount has widened to Rs 140 per gram or 5.2% now, which meant forgoing the interest for the first 2 years, investors were advised to avoid this tranche and wait for the next one.
During the first tranche, the top 10 receiving offices in terms of subscription amount were HDFC Bank Ltd, ICICI Bank Ltd, YES Bank Ltd, Allahabad Bank, Bank of India, Andhra Bank, Karur Vysya Bank Ltd, DCB Bank Ltd, State Bank of India and Federal Bank.
In January, came the second tranche of sovereign gold bond and received subscription for 3,071 kg gold amounting to Rs 798 crore.
What are the risks in investing in SGBs?
There is a risk of capital loss if the market price of gold declines. However,you do not lose in terms of the units of gold which he has paid for.
How much can one buy?
The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be two grams with a maximum buying limit of 500 grams per person per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant. T
How long does one have to hold the bonds?
The tenor of the bond is for a period of eight years with exit option from 5th year to be exercised on the interest payment dates.
Where can one buy the bonds?
These bonds are sold through banks, Stock Holding Corporation of India Ltd (SHCIL) and designated post offices. There is a commission of 1% on the subscription amount for distribution of bonds.
Who can buy?
Resident Indian entities including individuals, HUFs, trusts, universities and charitable institutions can buy the Sovereign Gold Bonds. One can buy jointly, in name of minor.
Is there nomination facility for Gold Bonds?
Yes . Nomination facility is available as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form is available along with Application form.
What proof will I have of investment in Gold bonds?
You will be issued Certificate of Holding on the date of issuance of the SGB. Certificate of Holding can be collected from the issuing banks/Post Offices/agents or obtained directly from RBI on email, if email address is provided in the application form.
What are the tax implications on interest earned?
Interest will be paid half yearly and the last interest will be paid on maturity along with the principal.
Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961(43 of 1961).
What are the tax implications on capital gain
Capital gains arising (if one exits through exchange) will be taxed as per the tax slab before 3 years and at the rate of 20 per cent post indexation after 3 years. Capital gains tax treatment will be the same as that for physical gold.
Budget 2016-17 has proposed that redemption of sovereign gold bonds by an individual be exempt from capital gains tax. It also provided that long-term capital gains arising to any person on transfer of sovereign gold bonds shall be eligible for indexation benefits.
Is tax deducted at source (TDS) applicable on the bond?
TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws
Is premature redemption allowed?
- Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates.
- The bond will be tradable on Exchanges, if held in demat form. The bonds are tradable on stock exchanges from the date to be notified by RBI. The bonds can also be sold and transferred as per provisions of Government Securities Act.
- It can also be transferred to any other eligible investor.
What do I have to do if I want to exit my investment?
In case of premature redemption, you can approach the concerned bank/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.
What are the procedures involved during redemption?
- You will be advised one month before maturity regarding the ensuing maturity of the bond.
- On the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record.
- In case there are changes in any details, such as, account number, email ids, then you must intimate the bank/PO promptly.
Is the price of bond on purchase maturity fixed?
The price of the bond is fixed in rupee terms, on the basis of the previous week’s (Monday – Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. . This time the Reserve Bank of India has fixed the issue price at Rs 2,600 per gram. . The first issue in November was priced at Rs 2,684 per unit.
Is the price of bond on maturity fixed?
No. The value of gold, like most precious minerals, fluctuates based on the law of supply and demand. The price of the bond is fixed in rupee terms, on the basis of the previous week’s (Monday – Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. The same procedure would be followed for calculating the redemption price for the bonds.
You pay 1% on the fund per year, but if you sell and put the proceeds in gold bonds, you earn 2.75%, and the net gain is 3.75%. However, take note of the tax implications and don’t forget that gold bonds are less liquid than ETFs. They have a tenure of eight years with an exit option after the fifth year. Purchases have to be made within the stipulated time and there is also a 500 g buying restriction per financial year.
Comparison of Gold Bonds with Other ways of investing in Gold
Should you invest in Gold Bonds?
Are you one of them, who consider the gold as a necessary investment? Are you planning to invest in gold bars or gold coins? Do you buy gold for pure investment purpose? Then you are not bothered about the liquidity and is ok with the interest rate offered then one can look at investing in these bonds.”You should invest. You will get the same return plus interest with peace of mind.
Are you planning to invest in Gold Bonds? Why or why Not? Did you invest in first or second tranche?
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