On Dhanteras, don’t buy the yellow metal, try the Sovereign Gold Bond scheme

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Updated: October 27, 2016 9:54:19 AM

Sovereign gold bonds are an efficient way to invest in the yellow metal as there’s no capital gains tax if held till maturity

Ahead of Dhanteras, the government has launched the sixth tranche of Sovereign Gold Bond Scheme. Resident entities such as individuals, HUFs, trusts, universities and charitable organisations can buy the bonds from October 24 to November 2 from banks, post offices, stock exchanges BSE and NSE and Stock Holding Corporation of India.

The tenor of the bond will be for eight years and the buyer will have an exit option from the fifth year which can be exercised on the interest payment days. The interest rate has been fixed at 2.5% per annum payable semi-annually, less than the 2.75% offered in the previous tranches.

However, the bonds have been offered at a discount as the issue price will be R50 a gram less than the nominal value. The price 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.

The fifth tranche of these bonds in September had received over two lakh applications representing around 2.37 tonnes of gold amounting to R820 crore. Since its launch last year, the five tranches have issued around 10 tonne of gold amounting to R3,000 crore.

The minimum quantity of investment will be one gram and the maximum is 500 grams per person per fiscal year. The buyer will have to give a self-declaration to this effect. In case of joint holders, the investment limit of 500 grams will be applied to the first applicant only. The bonds are available in both demat and paper form.

The payment for the bonds will be through cash for up to R20,000, demand draft, cheques or electronic banking. The redemption will be in rupees based on previous week’s simple average of closing price of gold of 999 purity. The bonds will be tradable on stock exchanges from a date to be notified by the Reserve Bank of India (RBI). For banks, the bonds will be eligible for the mandatory Statutory Liquidity Ratio purpose.

The bonds can be used as a 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 set the LTV ratio for loan against jewellery cannot be over 75%. LTV ratio refers to the amount of loan one can get on keeping gold as security 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 or bar 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.

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.

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. While gold in physical form does not earn any regular income, the investor benefits when price of the metal appreciates. Moreover, gold bonds also score over exchange traded funds (ETFs) of mutual funds as there are no fund management charges. However, unlike gold ETFs, gold bonds are not that liquid. Gold ETFs are actively traded on the exchanges and one can easily liquidate position any time during the market hours. So, with gold prices down by 5% in the last one month, investing in Sovereign Gold Bond can help you reap higher returns in the long run.

* Interest rate on the bonds is 2.5% per annum payable semi-annually
* Tenor of the bonds is eight years with exit option from the fifth year
* Redemption will be based on previous week’s simple average of closing price of gold of 999 purity
* Issue price is Rs 50 a gram less than nominal value, based on simple average of closing price of gold of 999 purity for week preceding subscription period
* Minimum investment is one gram and maximum 500 grams every fiscal year

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