Sovereign Gold Bonds

Government of India’s, Sovereign Gold Bond (SGB) 2016 -17 Scheme’s 7th Tranche was open for subscription from February 27, 2017 to March 03, 2017. The nominal value of Gold Bond was fixed at ` 2893 per gram of gold, after offering a discount of ` 50 per gram on the average closing price for gold of 999 purity of the week prior to the subscription period which worked out to ` 2943 per gram and its figures for collections are awaited. The total collections under earlier six SGB Schemes, as per the government’s statement, have been to the tune of 14.071 tonnes worth of Gold, with bonds subscribed amounting to ` 4127 crore. The latest estimates by the World Gold Council, suggest Gold with Indian households and temples to be around 24,000 tonnes.

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of Gold. They are substitutes for holding physical Gold. Investors have to pay the issue price in cash and the bonds can be redeemed in cash on maturity. The SGBs are issued by Reserve Bank on behalf of Government of India. SGBs are sold through scheduled commercial banks (excluding RRBs), SHCIL offices and designated Post Offices either directly or through their agents. India imported Gold worth $ 34982 million in 2015 and this is a drag on the Foreign Exchange Reserves of the country. The SGB Schemes are launched with the aim to reduce demand, including through imports, for physical gold, and in process reduce India’s Current Account Deficit (CAD).

Key Features and Advantages of Investing in Sovereign Bonds are as under:

  • The SGBs offer Superior Alternative to holding Gold in physical form as the investors do not lose in terms of the units of Gold which they paid for. Investors earn returns linked to Gold prices as the Bonds are issued in denominations of one gram of Gold and in multiples thereof. Minimum investment: 1 gram. Maximum investment: 500 grams.
  • Assurance of Purity: RBI announces the price before the issue date which is fixed on the previous week’s simple average of closing price of Gold of 999 purity (24 carat) published by India Bullion and Jewelers’ Association Ltd.
  • SGBs carry Sovereign Guarantee both on redemption amount and on the interest. Investors are assured of the market value of Gold at the time of maturity and periodical interest. The Bonds bear interest at the rate of 2.50% or 2.75% (fixed rate as per the scheme) per annum on the amount of initial investment. Interest is credited semi-annually to the bank accounts of the investors and the last interest is payable on maturity along with the principal.
  • The Quantity of Gold, for which the investors pay, is protected, since they receive the ongoing market price of Gold at the time of redemption/ premature redemption. However, there may be a risk of capital loss if the market price of Gold declines.
  • Safest: The risks and costs of storage are eliminated as the SGBs are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.
  • Easy Exit Option: The tenor of the SGBs is for 8 years with an option to redeem from 5th year onwards on the date on which interest is payable.
  • SGBs are Tradable on National Stock Exchange of India Limited.
  • Tax Benefits: No TDS is applicable on interest indexation benefit if Bond is transferred before maturity and Capital GAIN Tax is exempted on redemption. However, interest on the SGBs is taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961).
  • The SGBs can be Gifted / transferred to a relative/friend/anybody, fulfilling the eligibility criteria. The Bonds are transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer.
  • SGBs are eligible to be used as Collateral Security for Loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC), as per the guidelines prescribed by RBI from time to time for the Gold Loans.

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Points Physical Gold Gold ETF Sovereign Gold Bond
Returns Lower than actual return on gold Lower than actual return on gold Higher than actual return on gold
Safety Risk of handling physical gold High High
Purity of Gold Purity of Gold always remains a question High as it is in Electronic Form High as it is in Electronic Form
Capital Gain Long term capital gain applicable after 3 years Long term capital gain applicable after 3 years Long term capital gain applicable after 3 years. ( No Capital gain tax if held till maturity )
Collateral against Loan Yes No Yes
Tradability / Exit Route Conditional Tradable on Exchange Tradable on Exchange. Redemption 5th year onwards with GoI
Storage Cost High Very Low Very Low
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