Gold Bond Scheme
Gold Bond Scheme
India’s tryst with gold dates back to the most ancient of times, way back to the days of the famed Kohinoor diamond. Though the reverence attributed to it scales above its market price, the making charges of gold are often unaffordable. This recently prompted the Indian government to come up with alternatives in the form of gold bonds. In this article, we look at the various aspects of the Gold Bond scheme in detail.
Sovereign Gold Bonds
Sovereign Gold Bonds (SGB) are government securities denominated in grams of gold. It is suitable for investors who view gold as an investment than an as an accessory. And, provides an alternative for physical gold investments.
Sovereign bonds could be individually or jointly held by any Indian resident, be it individuals, trusts, HUFs, charitable institutions or universities. A minor may also be a part of it if he/she is represented by a qualified person.
A customer may make an online application through the website of the listed scheduled banks, upon which the allotment will be issued if the application matches the specified criteria.
Investors who are part of the scheme will be issued a Holding Certificate, which can be converted to a demat form. These bonds are issued by the Indian government on behalf of the RBI.
The bonds are assessed in multiples of grams(s) of gold and multiples thereof, wherein the basic unit is one gram. Investors may enrol into this scheme with a minimum investment of one gram of gold, with an upper limit of 4 kgs of gold for individual investors and HUF. Trusts and investors may invest up to 20 kgs of gold. Limits in respect of joint holding will fall on the first applicant.
The annual ceiling (based on the financial calendar) includes bonds subscribed under different tranches during initial issuance by the Government, along with the ones which were purchased from the secondary market. The ceiling of investments excludes the holdings as collateral by banks and other Financial Institutions.
The period of maturity for these bonds are eight years, though investors may choose to withdraw from the 5th year (only on interest payout dates).
The nominal value of Gold Bonds shall be in Indian Rupees and is affixed by considering the simple average of closing price of 999 purity gold. On the same note, the Gold Bonds could be redeemed in Indian Rupees and the price of redemption, as is the case with its pricing, will be in accordance with the simple average of the closing price of 999 purity gold. The interest and redemption proceeds will be remitted to the bank account of the customer during the purchase of the bond.
Norms of Payment
Payments for this purpose could be remitted online if the sum of money doesn’t exceed Rs. 20,000. It may also be issued in the form of a Cheque or Demand Draft (DD). Online cash remitters will be provided with a service charge deduction of Rs. 50.
SGB currently has an annual fixed rate of 2.50%, which is remitted twice a year on the nominal value. The final instalment of interest will be payable on maturity along with the principal. Its returns are usually linked to the prevailing market price of gold.
Interest on these Bonds will be taxed as per the Income Tax Act of 1961, though the tax on capital gains arising out of redemption will be exempted. The benefits of indexation will be granted for Long Term Capital Gains (LTCG) resulting out of a bond transfer. On another meritorious note, these bonds do not qualify for the provisions of Tax Deducted at Source (TDS).
Statutory Liquid Ratio
Statutory Liquid Ratio (SLR) refers to the capital to be retained by a commercial bank before the issue of credit to its customers. Banks qualify for this provision if they have acquired bonds after undergoing the process of raising lean, hypothecation or pledging.
These bonds are sold by the government through mediums such as bonds, Stock Holding Corporation of India Limited (SHCIL), and designated post offices. Trading may also be conducted directly through recognized stock exchanges or intermediaries.
The concerned officers would levy 1% of the overall subscription amount as commission for the bond’s distribution. Part of this commission (or more) will be shared with intermediaries, who could be in the form of agents or brokers.
Why Choose This Scheme?
- Its risk-free nature, despite the existence of market risks where capital losses may occur. Also, there is no cost of storage as in other bonds.
- Online remittance facility.
- Guaranteed Annual Interest at the rate of 2.50%.
- Scope for asset appreciation.
- The provision of Sovereign guarantee.
- Exemptions from tax on capital gains (if held for the entire period of maturity – 8 years).
- Indexation benefits.
- Tradability at the stock exchange (within a specific timeline on the discretion of the issuer).
- The consideration of sovereign bonds as security against secured loans. Banks treat SGB as gold after setting the loan-to-value (LTV) ratio to the value of gold.