Love for “Gold-the lifeline for rainy days” is deeply rooted into the Indian tradition but this love for physical gold when imported is a burden on the Indian economy. The Government of India (GoI) in an effort to monetize physical gold introduced Sovereign Gold Bonds (SGB) Scheme in November 2015.
SGBs are government securities denominated in grams of gold issued by RBI on behalf of GoI. With the Reserve Bank of India issuing these gold bonds, it brings in transparency and trust, providing an avenue wherein people can own gold without having to worry about its storage or safety. The investors have to pay the issue price in cash and the securities will be redeemed in cash on maturity as per the market value of gold.
Sale and Redemption Price of Sovereign Gold Bonds
The nominal value of Gold Bonds as issue/redemption price shall be in Indian Rupees fixed based on simple average of closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period/ redemption date.
Recently, the tenth tranche of the government’s SGB scheme opened for subscription on January 11 till January 15. For the tenth instalment of the gold bond scheme, an issue price of ₹ 5,104 per unit, equivalent to the value of one gram of gold, is applicable. A discount of ₹ 50 per unit is applicable for those investing in the gold bonds online, and the payment against the application is made through digital mode.
Eligibility– Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors would include individuals, HUFs, trusts, universities and charitable institutions. Joint holding is permitted. Also, a minor can invest in SGB provided the application is made by her/his guardian.
Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March). Each family member can own maximum 4 kg each in her/his name.
Returns– The bonds bear an interest of 2.5% p.a. paid semi-annually on the amount of initial investment. The bonds will yield capital appreciation at the end of 8 years or at an early redemption date or on sale in the secondary market.
Risks– There is the risk of capital loss in case market prices of gold fall, but the investor will not lose onto the units of gold for which s/he has paid.
Liquidity– The maturity period of the bond is eight years. However, the investor can exit from the scheme after the specified lock-in-period of 5 years or by selling them on Exchanges, if held in demat form. Even part holdings can be redeemed in multiples of 1 gm.
Commission– Commission for mobilizing subscription shall be paid at the rate of Rupee one per hundred of the total subscription received by the receiving offices on the applications received and receiving offices shall share at least 50% of the commission so received with the agents or sub-agents for the business procured through them.
Unique Feature– These bonds are eligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFCs). The Loan to Value ratio will be the same as applicable to ordinary gold loan prescribed by RBI from time to time. Bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone shall be counted towards Statutory Liquidity Ratio.
Taxation– The Interest Income received by the investor will be entirely taxable as per the applicable Income Tax Rates. For an investor who falls in the 30% tax bracket; interest income will be charged at 30%+4%cess.
Capital gains if received on redemption at its maturity period i.e., 8 years; capital gain will be entirely tax-free. This makes SGB quite a lucrative option. But, if an investor exits the SGB Scheme after the lock-in period of 5 years or sells it in the secondary market, then the capital gains will be taxable in the hands of investor. Short-term capital gains (less than 3 years) will be taxed as per the tax bracket the investor falls in and long-term capital gains (more than 3 years) will be taxed at 10% flat rate or at 20% after getting the indexation benefits.
With the options of holding physical gold, Gold ETFs, Golf Mutual Funds and SGB in a line, Investors usually are in a fix for which option to go for. All these available options come with their own merits and demerits and it is the matching of these options to the needs of the investor that the best option can be figured out.
Physical Gold, being tangible can be put into use as jewellery and it also gives solace to the individual of it being of some value and a dependable asset for tough times. But physical gold is usually expensive as making charges and other such incidental costs inflate its price and the purity of gold always stands questionable. Expenses on its storage cost and the risk of theft etc reduce its lucrativeness.
Gold ETFs is a highly liquid option, wherein investment in gold can be held in demat form and can be traded on stock exchanges just like shares. Returns are usually linked to return on gold and are a suitable option for a short-term investment.
Gold MF are open-ended options and returns usually linked to that on physical gold but the exit load compromises on the return portion. Again, a liquid investment and a suitable option for investors to invest through SIPs.
SGBs as already stated are highly suggested for investors with an 8-year investment horizon, can bring in desired diversification to their portfolio and capital gain tax exemption on redemption plays in their favour. Also, half yearly interest is an add-on to physical gold holding.
Depending on the Risk, Return, Liquidity profile of the investor, s/he can opt for any of the above options to invest in Gold. Gold as a sole asset to depend on in dealing with the life balance sheet is not what is suggested but is highly suggested as an asset class to bring in diversification to the portfolio and an asset one can call on in difficult times.