What is the Sovereign Gold Bond Scheme?
The government of India recently launched a
Sovereign Gold Scheme to provide an alternate option when it comes to owning
gold. This scheme aims to reduce the demand for physical gold, thereby keeping
a tab on gold imports and utilizing resources effectively. 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.
How does
Sovereign Gold Bond Scheme operate?
Under the Sovereign Gold Bond Scheme, the
Reserve Bank of India will issue the bonds on behalf of the Government of
India. The bonds will be sold at SHCIL, post offices and banks and issued in
denomination of gram. They will issue these bonds on payment of money. Later
on, the bonds will be connected to the price of gold. Investors have to pay the
bond price in cash. From one person, the Sovereign Gold Bond Scheme would accept
a minimum investment of 1 gm gold and a maximum investment of 500 gm in a
single fiscal year. The bonds will pay a yearly interest of 2.5% to investors.
Interest would be paid semi-annually based on the initial value of investments.
Key Features
Ø The
bond bears an interest at the rate of 2.50% (fixed rate) per annum on the nominal
value.
Ø Interest
will be credited semi-annually to the investor's account and the last interest
will be payable on maturity along with the principal.
Ø Investors
will earn returns linked to gold prices.
Ø Bond
carry sovereign guarantee both on redemption amount and on the interest
Ø Minimum
investment: 1 gram. Maximum investment: 500 grams.
Ø Available
in DEMAT and paper form.
Ø Issuance
through trading members of NSE.
Ø Tradable
on National Stock Exchange of India Limited.
Advantages
Cost: The biggest advantage is on the cost front when compared to buying
physical gold or through gold ETFs. The 'making charges', akin to entry charge,
is nearly 25 per cent for jewellery but in SGBs it's non-existent. In gold ETF,
there's an expense ratio (fund management cost) of about 1 per cent in addition
to the demat charges. However, there's no cost involved and no charges of any
nature applicable on buying SGBs. Even the purchase price is the average of the
gold prices of the previous week and a further discount of Rs 50 on that
average price so arrived. So if the average price is arrived at Rs 3,000 per 10
gram, the SGB investor gets it at Rs 2,950.
Taxation: Another big advantage is on the tax front. Physical gold,
when sold after holding it for 36 months, will result in capital gains tax of
20 per cent after indexation. The redemption of SGBs will not result in tax.
The 2016-17 Budget had proposed that the redemption of the bonds by an
individual be exempt from the capital gains tax. Therefore, holding till
maturity has its tax advantage.
Redeeming in stock exchange may, however, result in capital gains or loss and one may have to pay tax accordingly. Interest on the bonds is, however, fully taxable as per the tax rate of an investor. For someone in the 10, 20, or 30 per cent tax bracket, the post-tax return comes to 2.47 per cent, 2.18 per cent, and 1.9 per cent respectively.
Redeeming in stock exchange may, however, result in capital gains or loss and one may have to pay tax accordingly. Interest on the bonds is, however, fully taxable as per the tax rate of an investor. For someone in the 10, 20, or 30 per cent tax bracket, the post-tax return comes to 2.47 per cent, 2.18 per cent, and 1.9 per cent respectively.
Interest: SGBs, unlike physical gold or gold ETFs, earn interest on
the investment made. The government has fixed interest of 2.50 per cent per
annum (till tranche 5, it was 2.75 per cent) on the investment, payable
half-yearly. This is a direct advantage, though nominal when compared to
holding physical gold or gold ETF units.
Safest: Zero risk of handling physical gold.
Assurance of Purity: RBI
will announce the price before the issue date which will be fixed on the
previous week's simple average of closing price of gold of 999 purity (24
carat) published by IBJA less Rupees 50 per gram.
Sovereign Guarantee: Both
on redemption amount and on the interest.
Easy Exit Option: The
tenor of the bond is for 8 years with an option to redeem from 5th year onwards
on the date on which interest is payable.
Traded on Exchange: All
earlier issuance of SGB are available for trading on NSE.
Ease of Borrowing Loan: Can
be used as collateral for loans.
Comparison of Physical gold,
Gold ETF and Sovereign Gold Bond
|
Points
|
Physical Gold
|
Gold ETF
|
Sovereign Gold Bond
|
|
Returns
|
Lower than actual return on gold
|
Lower than actual return on gold
|
Higher than actual return on gold
|
|
Safety
|
Risk of handling physical gold
|
High
|
High
|
|
Purity of Gold
|
Purity of Gold always remains a
question
|
High as it is in Electronic Form
|
High as it is in Electronic Form
|
|
Capital Gain
|
Long term capital gain applicable
after 3 years
|
Long term capital gain applicable
after 3 years
|
Long term capital gain applicable
after 3 years. ( No Capital gain tax if held till maturity )
|
|
Collateral against Loan
|
Yes
|
No
|
Yes
|
|
Tradability / Exit Route
|
Conditional
|
Tradable on Exchange
|
Tradable on Exchange. Redemption-
5th year onwards with GoI
|
|
Storage Cost
|
High
|
Very Low
|
Very Low
|
Risk associated with Sovereign Gold Bonds
Gold is traditionally a very safe investment,
and typically the risk associated with Sovereign gold bonds is very low.
However, given the fact that gold rates depend on market performance, any drop
in gold rates could put the capital at risk, which would be the case even if
one owned physical gold. Regardless of market rates, an investor should take
solace in the fact that the amount of gold he purchased doesn’t change.
KYC Documents required
The following KYC documents are required to
invest in Sovereign Gold Bonds:
Proof of identity (Aadhaar card/PAN or TAN
/Passport / Voter ID card)
KYC process will be carried on by bond issuing
banks, agents or post offices.
Conclusion
Linking any investment to one's long-term goal is important. It helps in not only earmarking savings towards an identified goal, but also avoiding the temptation to make any early exits, thus jeopardising the goal. SGBs may prove handy in accumulating gold as an alternative to buying physical gold. However, linking savings in SGBs to children's education, marriage or any other specific goal might not serve the purpose, hence invest accordingly.
Linking any investment to one's long-term goal is important. It helps in not only earmarking savings towards an identified goal, but also avoiding the temptation to make any early exits, thus jeopardising the goal. SGBs may prove handy in accumulating gold as an alternative to buying physical gold. However, linking savings in SGBs to children's education, marriage or any other specific goal might not serve the purpose, hence invest accordingly.
Most financial planners
suggest gold allocation of not more than 10 per cent of one's investment
portfolio. One may keep investing in various tranches of SGBs as and when they
are issued by the government. SGBs suit those who are dedicated buyers of physical
gold and keep accumulating it through their savings.
Every SGB issue will have a lock-in of five years and hence linking it to one's long-term goal may not help much, unless one buys SGBs in lump sum. Although they are listed on stock exchanges and provide liquidity route, the secondary market transactions and the tax impact, thereby, may not suit all investors.