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Thursday, November 3, 2016

Sovereign Gold Bonds Scheme


Government of India gave approval for the launch of Sovereign Gold Bonds Scheme. Let us go into detail about this scheme and to whom it actually suites.

Sovereign Gold Bonds Scheme

The government launched this scheme to reduce the demand of physical gold. Indians buy around 300 tons of gold every year. This is to be imported from outside countries. Let us see the silent features of this scheme.

  • You will get the bonds in rupee terms (like Rs.1, 000 or Rs.5, 0000) but the amount will be determined in grams of gold.
  • Bonds will be issued on behalf of the Government of India by RBI. So there no doubt of default. Therefore, these bonds will have a sovereign guarantee.
  • The distribution cost and sales commission will be payable by the Government.
  • This scheme will be available only Resident Indians.
  • An individual can buy the maximum of 500 grams per year.
  • The rate of interest on such bond will be fixed by the Government. This will be calculated based on the value of gold you will invest. The interest may be floating or fixed as per choice.
  • You can hold such bonds in Demat or paper format.
  • Denominations of bonds will be 5, 10, 50, 100 grams of gold.
  • The price of the gold will be the reference rate decided by RBI in USD converted to rupees on the RBI price on the day you buy.
  • You can buy this scheme bonds from Banks/NBFCs/Post Offices/ National Saving Certificate (NSC) agents and others, as specified. They are the point of contact for buying and redeeming the bonds.
  • The minimum tenure of the bond will be 5 to 7 years.
  • In case of emergency, you can pledge these bonds to raise loans. Available loan guidelines will be exactly like RBI guidelines on gold loans.
  • If you want to come out of these bonds before the maturity period, you can do so by selling it on the exchange.
  • You have to follow the KYC norms.
  • As of now the taxation will be same as that of physical gold (Sold within 3 years leads to STCG at your applicable tax rate and if more than 3 years then it will be LTCG at 20% with indexation). But they are planning it to be attractive in coming days.
  • When you redeem the bond then you will get the amount back based on the gold price of that time.
  • However, the interest on this bond will be calculated on the total value at the time of investment.
  • Therefore, there are two types of returns you can expect. One is interest income from your original investment amount and the second is price appreciation (nowadays I may say depreciation).
  • Let us say, at the time of your redemption, the gold price fall drastically, then you have an option not to withdraw and continue again by buying the bonds at the prevailing rate of that time.
  • You have to bear the volatility of gold and risk is purely on you. If the gold price rises then you get a good price. At the same time, gold price decreases, then you get negative returns.

What are the advantages?

  • No need of safekeeping and worry about robbery
  • You get interest income (may be around 1% to 2%) from this investment (which in my view be taxable).
  • Along with interest income, you will get the benefit based on the price movement of gold price.
  • In my view, it is best to invest in this bond than whoever planning to invest in an ETF. Because there are expenses and Demat holding costs to ETF, which is not in this bond.
  • A sovereign guarantee of the Government of India will feel you SAFE.

What are disadvantages?

  • Before jumping into an investment, think whether a gold investment is really a worth. Because Gold will give you a return of debt products with volatility as much as that of equity.
  • KYC requirement may hurdle for the few who feel no necessity of such KYC while buying physical gold.
  • In my view, this is not a game changer. Because many buy gold from unaccounted money. So they may still stay away from such scheme.
  • Do remember that this bond is backed of Government of India. But it does not mean that this will fetch you positive returns. If gold prices fall then you may end up getting a negative return. The only guarantee from Government is about the return of money, but the return on investment. Hence, the gold risk is always on your HEAD.
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