Decoding sovereign gold bond scheme

Decoding sovereign gold bond scheme
Highlights

The government has launched sovereign gold bond last year to reduce the import burden of gold. It acts as an alternative investment form to the physical gold. The advantage of this scheme is that investors not only benefit from buying bonds at the prevailing gold prices but also earn an additional interest. Each bond holds a minimum of 2 gm value equivalent of the physical gold

The government has launched sovereign gold bond last year to reduce the import burden of gold. It acts as an alternative investment form to the physical gold. The advantage of this scheme is that investors not only benefit from buying bonds at the prevailing gold prices but also earn an additional interest. Each bond holds a minimum of 2 gm value equivalent of the physical gold

There has been an elevated chatter through various references, SMS, etc, in the media, government circles and even in the banks on the sovereign gold bonds (SGB). The govt has launched this scheme along with the gold monetisation scheme (GMS) last year to reduce the import burden of gold. While the earlier scheme tries to suck in the excess gold reserves from the households, this scheme acts as an alternative investment form to the physical gold. The advantage of this scheme is that investors not only benefit from mapping the prevailing gold prices but also earn an additional interest.

This scheme entails the invested amount into a form of bond which could be retained either in a physical or demat form. SGB guarantees the purity and quantity of the investment at the time of redemption or even while trading. So, the investor doesn’t need to worry about the quality, risks and storage like that of physical gold. Also, they’re devoid of the making charges that usually eat into the jewellery purchases. Each bond holds a minimum of 2 gm value equivalent of the physical gold. The maximum investment is limited to 500 gm in any financial year. In case of joint holding, the limit applies to the first holder.

The tenure of the bond is for a period of eight years with exit options at the end of 5th, 6th and 7th year. Also, the bonds will be traded on the exchange making them liquid even before the exit option timelines. As these bonds carry sovereign guarantee both on the capital invested and the interest earned, these bonds could be used as collateral. The taxation is similar to that of the physical gold during exit. The govt has clarified that the complete capital gain tax exemption upon the SGB at the time of maturity and indexation is considered benefit if the bond is transferred before the maturity. The interest rate is fixed at 2.75 per cent per annum paid semi-annually. In a later circular, the govt. said that the tax exemption on the interest of the SGB would come into force post April 2017. For now, though, the interest on these bonds is taxable as per the provisions of the Income Tax Act, 1961 (43 of 1961)

Any resident Indian is eligible to invest in these bonds. Besides the individuals, HUFs, trusts, universities and charitable institutions are also eligible to invest in these bonds. Joint holders are allowed and even minors are allowed invest provided it’s done at the behest of a guardian.

(The author is a practising financial planner and could be reached at k.naresh.k@gmail.com)

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