Investors will get a 2.75% annual interest on the sovereign gold bond, the government said on Friday, seeking to provide an alternative to the purchase of physical gold in the country. However, contrary to earlier expectations, the gains will be taxable–a move that would dampen the appeal of the scheme and be a drag on its success.
The bond will remain open for public subscription for a fortnight through November 20 and will be issued on November 26, the finance ministry said in a notification.
The scheme will offer investors a choice to buy bonds worth a minimum of 2 grams of gold, up to a maximum of 500 grams. The 2.75% interest has been fixed per annum, payable semi-annually on the initial value of investment.
The interest will be taxed, as per the provisions of the Income Tax Act, and the capital gains would also be the same as in the case of physical gold. The bonds will be sold through banks and designated post offices, as may be notified. This is the first tranche of the gold bond scheme and subsequent tranches would be notified later, according to the statement.
Although the government hasn’t provided any estimate for the expected investment under the bond scheme in the latest notification, the draft sovereign gold bond scheme, released in June, had pegged the targetted investments to the tune of 50 tonnes, worth around Rs 13,500 crore, in the first year of introduction.
The bonds will be for a period of eight years with exit option from the fifth year, to be exercised on the interest payment dates. The price of the bond will be determined in the rupee term on the basis of the previous week’s (Monday–Friday) simple average of the closing price of gold, with 999 purity, published by the India Bullion and Jewellers Association, it added. The same principle would be followed for calculating the redemption price for the bonds.
Last month, the Cabinet had approved the schemes on gold monetisation and bonds. While the monetisaiton schemes aims to tap household gold stocks of around 22,000 tonnes, through the bond scheme, the govenrment wants to shift part of the estimated 300 tonnes of physical gold bars and coins purchased every year for investment into the ‘demat’ gold bonds so that the impact of huge imports on trade balance can be contained on a sustainable basis. Both the schemes and sovereign gold coins were proposed in the Budget for 2015-16 by finance minister Arun Jaitley.
The sovereign gold bonds can be used as collateral for loans and the loan-to-value ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank of India from time to time, it added.
The bonds would be tradable on exchanges and would be eligible for statutory liquidity ratio. The bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, universities and charitable institutions.
There would also be a commission of 1% on the subscription amount for distribution of bonds. The borrowing through gold bonds would form part of market borrowing programme of the government. The bonds would be issued by the RBI.
India mports as much as 800-1,000 tonnes of the precious metal each year. Authorities hardened a crackdown on the imports of an “idle asset” like gold, especially in 2013-14, after the current account deficit had hit a whopping 4.7% of GDP in 2012-13.
Major features of the sovereign gold bond, as announced by the finance ministry: