India's hunger for gold is too well-known. While the stock market is on a downward journey, the yellow metal has witnessed a spectacular rally in the recent past. Of course, the important reason for India being a poor country is its richness in gold. World Gold Council estimates show Indian households hold over 25,000 tonnes ($1,400 billion) of the yellow metal. Indian demand has averaged 838 tonnes over the last 10 years. Around 90-95 tonnes of gold was smuggled into the country in 2018.
Gold is an unproductive asset. Even if a part of this hoarding is converted into productive capital, it will help India fight the scourge of poverty. Other than physical form, gold can be acquired in non-physical form via sovereign gold bonds, gold funds, gold exchange traded funds. Sovereign Gold Bond scheme is an attempt by the government to discourage people from buying physical gold.
Sovereign Gold Bond scheme was launched by the government in November 2015 with a hope to monetise gold by encouraging people to shift away from physical gold. The issues are opened from time to time for subscription in tranches by the Reserve Bank of India (RBI) in consultation with the government. Let us have a look at the wisdom of launching such an elaborate scheme and the related tax concessions through the 2019-20 Series IV which opened for subscription on September 9 and closed on September 13th. This tranche of gold bonds is the last in the series of four issuances planned for FY 19-20.
• Individuals either self or on behalf of a minor child, trusts, HUFs, charitable institutions can invest in these bonds, either in physical or demat mode.
• The issue price has been fixed at Rs 3,890 per gram. To support the motive of going digital, a discount of Rs 50 has been offered on payments through digital mode (RTGS, NEFT or online).
• The minimum investment is 1 gram and in multiples thereof. The maximum limit is 4 kg for individuals & HUFs. The limit is higher at 20 kg for trusts , universities, and similar notified institutions. This maximum limit shall apply per FY (April-March) and will include bonds subscribed under different tranches during initial issuance by the government and those purchased from the secondary market.
• The term is 8 years. Pre-mature redemption is available after 5th year and is payable on the next interest payment date. The redemption price shall be fixed in Indian rupees and shall be based on simple average of closing price of gold of 999 purity of the previous three working days, published by the India Bullion and Jewelers Association.
• The bonds would be traded on stock exchanges within a fortnight of issuance, offering an early exit option for investors. However, the liquidity will certainly be an issue, resulting in the strike price being at a heavy discount to the market price.
• Interest @ 2.50% annual, will be credited semi-annually directly to the bank account of the investor. It happens to be fully taxable but does not attract TDS.
• Bonds held till maturity will be exempt from tax on capital gains. This happens to be an exclusive tax benefit which is not available other for physical gold, gold ETF, gold fund, etc. Premature encashment of these bonds will attract the normal provisions of capital gains.
• Bonds can also be used as collateral for loans.
To Buy or not to Buy
It is obvious that the target audience of this scheme is an investor in gold who aspires to gain from the rise in its future price. The Reserve Bank endorses investments in gold via SGB because it thinks the risks and costs of storage are eliminated. Further, it states that investors are assured of the market value of gold at the time of maturity and periodical interest. One other advantage RBI points out is that SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip, the RBI states. (The authors, AN Shanbhag and Sandeep Shanbhag, are tax consultants and can be reached at email@example.com)