At a time when global gold prices are rising, the government has launched the seventh tranche of Sovereign Gold Bond. This will be the last tranche for the current financial year. Individuals, Hindu Undivided Families, trusts, universities and charitable organisations can buy the bonds till March 3 from banks, post offices, stock exchanges BSE and NSE and Stock Holding Corporation of India. The issue price of the bond for this tranche has been fixed at R2,893 per gram of gold. The government is giving a discount of R50 on the nominal value of R2,943 per gram. The nominal value is fixed on the basis of simple average of closing price of gold of 999 purity published by the Indian Bullion and Jewellers Association for the week preceding the subscription period (February 20 to 23).
Bonds earn interest
Gold bonds are a better way to invest in the metal as the investment will earn an interest over and above the appreciation in the value of gold. The Sovereign Gold Bond, gold monetisation scheme and Indian gold coin were launched by Prime Minister Narendra Modi in 2015 to reduce gold imports.
The interest rate has been fixed at 2.5% per annum payable semi-annually. The tenor of the bond will be for eight years and the buyer will have an exit option from fifth year which can be exercised on the interest payment days. The minimum quantity of investment will be one gram and the maximum is 500 grams per person per fiscal year. For joint holders, the investment limit of 500 grams will be applied to the first applicant only.
Bond as collateral
The bonds can be used as collateral for loans, similar to other financial products such as mutual funds, life insurance policy, Public Provident Fund, etc. The loan-to-value (LTV) ratio will be set at the ordinary gold loan mandated by RBI. At present, the central bank has said the LTV ratio for loan against jewellery cannot be over 75%. LTV ratio is the amount of loan one can get against mortgaging the metal to a bank or a non-banking financial company.
The know-your-customer documentation will be same as that for purchase of physical gold from a jeweller and coins from a bank or post office. Documents such as voter-card ID, Aadhaar card, PAN or TAN, password will be required from the buyers. The payment for the bonds will be through cash for up to R20,000, demand draft, cheques or electronic banking. Capital gains tax will be exempted on redemption of the bonds. Also, the long-term capital gains arising to any person on transfer of the bonds will be eligible for indexation benefits.
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Globally, gold price is increasing as weakness in the dollar is pushing up the demand for the precious metal as a safe haven. The issue price for first tranche of sovereign gold bonds issued in November 2015 was R2,684 per gm and the interest was 2.75% per annum. In the sixth tranche (October 2016), the issue price was fixed at R2,957 per gram of gold. The government had budgeted to raise R10,000 crore from the three tranches this financial year. However, it mopped up only R3,809 crore, which is about 2% of the country’s annual consumption.