3rd tranche of Gold Bond Scheme opens today; Should you invest?

Sovereign Gold Bonds are issued by RBI, in both demat and paper form, on behalf of the Government of India on payment of the required amount in rupees and are denominated in grams of gold.

Gold prices
Gold prices held steady in the absence of any worth-while buying activity by jewellers, while silver prices remained off-colour for the sixth straight day, plunging Rs 320 to Rs 39,580 on Monday. (Photo: Reuters)

The government has announced the launch of the third tranche of its Gold Bond Scheme which is aimed at providing a paper substitute for investors instead of buying physical gold. The issue will remain open from March 8 to March 14, 2016. Bonds will be issued to subscribers on March 29, 2016.

The issue price of the Gold Bond has been fixed at Rs 2,916 per gram of gold.

Advocating the scheme as the best option to invest in gold, in its reports said, “Sovereign gold bonds offer the best alternative to take exposure to gold as it offers additional interest. There are no annual recurring expenses as compared to gold ETFs (expense ratio in ETF is nearly 1%) and no storage hassle like those involved in physical gold holding.”

It further added the Budget 2016-17 has proposed that redemption of these gold bonds be exempt from capital gains tax. It also proposed that long-term capital gains (36 months or more) arising on their transfer will be eligible for indexation benefits.

During the second tranche issue, Sudip Bandyopadhyay, managing director and CEO, Destimoney Securities had said, “Sovereign Gold Bonds are a superior option for investors looking to invest in gold. Investors are further incentivised with a 2.75 per cent annual interest at the time of maturity. This product therefore gives a financial product-like return tagged with the appreciation of a gold.”

Gold outlook
The year 2016 has turned the wave in favor of safe haven demand amid extreme global capital market uncertainty. Global gold prices rallied around 17% since the start of 2016. The risk, which was initially confined to the commodity space, started to spill over to currencies, equities and credit markets as gauged by financial conditions and high yield bond market. As a result, there is a flight to safety and safe havens like developed market sovereign bonds and gold.

Here is all you need to know about the scheme before investing?

Who issues the bonds? Sovereign Gold Bonds are issued by RBI, in both demat and paper form, on behalf of the Government of India on payment of the required amount in rupees and are denominated in grams of gold.

Who can invest? The bonds can be subscribed by resident Indian entities including individuals, HUFs, trusts, universities, charitable institutions.

Where to subscribe? Investors can subscribe to the bonds at bank branches, Stock Holding Corporation of India Limited (SHCIL) and designated post offices.

What are minimum/maximum limit? Minimum permissible investment is 2 grams of gold to be paid in rupees. The maximum amount subscribed by an entity will not be more than 500 grams per person in a financial year.

What are returns? Government has fixed the rate of interest for the year 2015-16 as 2.75% per annum, payable on half-yearly basis. The rate for the bonds is fixed on the basis of simple average of closing price for gold of 999 purity of the previous week published by the India Bullion and Jewellers Association (IBJA).

What do subscribers get on maturity? On maturity, the investor will get the equivalent rupee value of the quantum of gold invested at the then prevailing price of gold.

What is the tenure? The bonds are for a period of 8 years with exit option from 5th year onwards, to be exercised on the interest payment dates.

What are tax benefits? The government has provided exemption from capital gains tax on the bonds. Long-term capital gains arising to any person on transfer of the bonds is also eligible for indexation benefits.

Why was scheme launched? The scheme, launched in November 2015, is aimed at encouraging investors to hold gold equivalent in demat form and thereby reducing demand for physical gold. India is one of the largest consumer of the yellow metal and imports about 1,000 tonnes of gold every year.

What was response to earlier rounds? The first two tranches of the scheme had garnered Rs 1,050 crore for the government. According to reports, the first tranche in November got subscription for 915.95 kg of gold worth Rs 246 crore. The second tranche was launed in January which received subscription for 3,071 kg gold amounting to Rs 798 crore.

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