‘Gold’en opportunity? All about Sovereign Gold Bonds as next tranche opens on July 10

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Updated: July 7, 2017 2:04:01 PM

With the next tranche of sovereign gold bonds set to open for application on July 10, here is all you would want to know before making a decision on whether you should buy a sovereign gold bond.

Sovereign gold bonds offer retail investors an opportunity to invest in the precious metal and get a fixed return on their investments in addition to any appreciation or depreciation in the price of the gold itself. (Image: Reuters)

The next tranche of Sovereign Gold Bonds opens for application next week — on July 10. This is the second issue of Sovereign Gold Bonds so far this fiscal year, and ninth overall. Sovereign Gold Bonds offer retail investors an opportunity to invest in the precious metal and get a fixed return on their investments in addition to any appreciation or depreciation in the price of the underlying asset — gold itself.

Further, the recent implementation of 3% GST rate on gold would also act as an advantage to the buyers of Sovereign Gold Bonds, which would not beat the tax. For those who are not emotionally motivated to hold physical gold in their hand and keep the shining metal in their lockers, it also offers the comfort on purity of the gold owned and the satisfaction of not having to shell out heavy making charges which accrue on physical gold purchases.

With the next issue set to open on July 10, here is all you would want to know before making a decision on whether you should buy Sovereign Gold Bonds.

What is a Sovereign Gold Bond?

Sovereign Gold Bond is a fixed-term bond issued by the Reserve Bank of India, which represents the exact weight of gold purchased by the investor for a period till the maturity of the security. Owning a gold bond is akin to owning actual gold, though not in the physical metal form, but rather in paper or demat form. The government introduced the Sovereign Gold Bonds scheme in 2015 in order to provide an alternative option to people to own gold without worrying about its storage or safety. It also seeks to reduce demand for physical gold and thereby keep a check on imports.

What are the benefits of Sovereign Gold Bonds over physical gold?

  • GST-free: The government has implemented a 3% GST on gold, gems and jewellery in the recent overhaul of India’s tax regime. Though this tax rate is lower than the lowest slab of 5% under GST for other taxable items, the GST on gold is still higher than 1% VAT which was levied earlier on gold bullion and jewellery. This would push up the cost of buying physical gold, but Sovereign Gold Bonds are immune from the levy of GST.
  • Additional return: Investors earn a fixed rate of return in addition to the underlying gold rate owned by them. The upcoming ninth tranche of Sovereign Gold Bonds will earn an interest rate of 2.5% per year, payable semi-annually.
  • Tax gains: The interest earned adds to investors’ taxable income, but redeeming the bonds at maturity is exempt from long term capital gains tax, unlike in the case of physical gold, which attracts capital gains tax on sale at any point. Sale or transfer of Sovereign Gold Bonds before the maturity will attract capital gains tax as per the period of the security held.
  • No making charges: Investors do not have to bear any making charges on buying the gold in form of Sovereign Gold Bonds, unlike what they have to pay when purchasing bullion, jewellery, gold coins, gold biscuits, etc.
  • Purity: Sovereign Gold Bonds are benchmarked against 999 purity gold. In Sovereign Gold Bonds, investors have the certainty of owning the gold of the quality promised to them at the time of the purchase, unlike the scope of adulteration in the metal bought from local jewellers or bullion traders.
  • Loan collateral: Sovereign Gold Bonds can be used as collateral for loans. The loan- to-value ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
  • Gold price: The price of these bonds closely tracks the rate of gold, and may be an advantage or disadvantage at the time of sale or redemption. Whatever the price of gold at any point of time, the amount of gold held will not change, only the price will.

What are the disadvantages of Sovereign Gold Bonds?

In India, most people still prefer to own physical gold. Practically, tradability and acceptability of physical gold is still very high as it can be readily sold to any local jeweller or bullion trader. For those who like to flaunt their jewellery at social occasions, Sovereign Gold Bonds are not an option at all.

How can you buy Sovereign Gold Bonds?

The application for the next tranche of Sovereign Gold Bonds, called Sovereign Gold Bonds 2017-18 — Series II, is open from July 10 to July 14. Investors can buy Sovereign Gold Bonds through banks, Stock Holding Corporation of India Ltd (SHCIL), designated post offices and stock exchanges BSE and NSE. The bonds will be issued on July 28, 2017. The payment for Sovereign Gold Bonds will be in cash (up to a maximum of Rs 20,000), demand draft, cheque, or electronic banking.

How much investment is required?

Sovereign Gold Bonds will be sold in the units of one gram gold each. Investors can buy as low as one gram-unit, and a maximum of 500 units per person or per entity in one financial year. Investors would have to furnish a self-declaration to this effect. The price of one unit is based on the simple average of 999 purity gold in one week preceding the issue, and will be kept at Rs 50 less than that. The India Bullion and Jewellers Association Ltd was quoting 999 purity gold at Rs 28,185 per 10 gram on Friday.

When and how could Sovereign Gold Bonds be sold?

The next tranche of Sovereign Gold Bonds has an 8-year maturity, which means that those could be redeemed at maturity after eight years, without any capital gains tax liability. Also, these bonds will be tradable on the stock exchanges within a fortnight of the issuance. The date will be notified by the RBI.

What does the government get out of it?

The government seeks to raise Rs 5,000 crore this financial year through its three gold schemes. The other two schemes are 1) Gold Monetisation Scheme, under which people can deposit their gold with banks and earn interest on it — it is a replacement of Gold Deposit Scheme 1999, and 2) Indian Gold Coin, which is India’s first ever gold coin and bullion to be issued by the Government of India. The government has so far raised Rs 5,400 crore from the previous eight tranches of the Sovereign Gold Bonds. Other than raising funds, the government also seeks to reduce import of physical gold and prevent the outflow of currency.

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