Gold is considered as a symbol of wealth in India and to take advantage of this thought, Government has come out with the issuance of first tranche of its most anticipated scheme ?Sovereign Gold Bond Scheme? just before Dhanteras, giving investor an option of investing in Gold Bonds instead of buying physical gold.
The issue price of Sovereign Gold Bonds is fixed at Rs.2,684 per gram of gold bearing interest rate of 2.75% p.a. payable half-yearly. Acceptance of Applications for first tranche of Sovereign Gold Bonds will begin from 5th November, 2015 and will end on 20th November, 2015. Bonds would be issued on 26th November, 2015.?This is the first tranche and subsequent tranches would be notified later.
Before deciding whether to invest in Sovereign Gold Bonds or Not, let us sail through the highlights of the scheme first.
Key Points of Sovereign Gold Bond Scheme
Sovereign Gold Bonds would be available only for Indian Residents either individually or jointly or in the name of minor as well. Indian Residents includes individuals, HUFs, trusts, universities and charitable institutions. KYC documents such as aadhar card, voter ID card, PAN etc. is mandatory for buying gold bonds. The bonds can be held either in paper form or demat form.
The application can be submitted to the Scheduled Commercial Banks and Post-offices before 20th November, 2015.
Minimum and Maximum Investment
The gold bonds will be denominated in multiples of gram(s) of gold with a basic unit of one gram. Government has fixed minimum investment in the bonds to be 2 grams with a maximum investment capped at 500 grams per person per fiscal year (April-March). If the investment is made jointly than 500 grams shall be applicable for first applicant.
Issue Price of Bond
Both Issue and Redemption price shall be in Indian Rupee. Issue price of the bond shall be the previous week’s (October 26-30, 2015) simple average closing price for gold of 999 purity, published by the India Bullion and Jewellers Association Ltd. (IBJA).
Currently Issue Price for the first tranche of Gold Bonds is fixed at Rs.2,684 per gram of gold that translates minimum investment of Rs.5,368 and maximum investment up to Rs.13,42,000.
Tenure, Redemption and Liquidity
Gold Bonds comes with tenure of eight years but investor can redeem prematurely from the beginning of the fifth year on the interest payment dates. Further, long-term investors can roll over their investments for additional period.
Gold Bonds can also be used to put as collateral for loans and the Loan to value (loan amount) will be equal to ordinary gold loan.
In addition, gold bond will be listed in bourses thus can be bought and sold but practically these types of bonds are rarely traded.
Investment in Sovereign Gold Bonds will fetch interest at the rate of 2.75% per annum. The interest will simple interest not compounded and will be paid half-yearly on the initial investment amount. An investment of Rs.1 lakh would fetch interest of Rs.2,750 per annum totaled to Rs.22,000 in 8 years.
The tax treatment of the Sovereign Gold Bonds is dampener. Similar to Physical Gold or Gold ETFs, Gold Bonds will also attract capital gain tax. On maturity, difference between issue price and redemption price will give rise to capital gains and will be taxed as per the holding period. If bonds are sold before holding for 3 years than the gains would be short-term and shall be added to the income and taxed as per slab rate. If bonds are sold after 3 years of holding than gains would be long-term and flat rate of 20% with indexation benefits would apply.
In addition, annual interest on the bonds is fully taxable. The interest shall be added to the total income as income from other sources and taxed as per the slab rate. For the investor falls in 10, 20 and 30 percent tax salbs, the post-tax returns would be 2.47 per cent, 2.18 per cent, 1.9 per cent respectively. However, no TDS shall be deducted on the interest income. The sole responsibility of paying tax on the interest income is on the investor only.
There may or may not be gains only, possibility of incurring losses cannot be ruled out however, seeing the history of gold prices, yellow metal tends to give good return in long tenure of 8 to 10 years.
Should You Invest in Sovereign Gold Bond Scheme?
Buying Gold Bars, Coins or jewellery costs a lot plus keeping it safe in locker is add-on cost and the fear of burglary always remain. Gold ETFs or gold mutual funds are free from the above limitations but, these come with an additional charge in form expenses ratio of 1%.
Gold Bonds are free from all the three limitations and in addition, SGBs also provides an interest income of around 2% per annum. Thus it is a win-win situation for investors.
However, there are couple of things to lookout.
- Gold ETFs can be easily liquidated while GSB are not frequently traded and thus are less liquid.
- Using SIP method, quantum of losses in Gold ETFs or Gold Mutual Funds due to price fluctuations in gold can be minimized but there is no such control in GSBs as there is a lump-sum investment.
If you are a long-term investor looking for diversification in your portfolio or investing in gold for marriage purpose of your children, than you should invest in Sovereign Gold Bond Scheme. However, an investor should not have more than 10% of his/her total portfolio in gold.