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Should you buy sovereign gold bonds?

Author: Balwant Jain/Wednesday, October 24, 2018/Categories: Bonds, Expert View

Should you buy sovereign gold bonds?

Indians are obsessed with gold and to satiate their need for investment in the yellow metal without adversely affecting the balance of payments, the Government of India introduced monetisation of Gold Scheme in 2015. As a part of the scheme, the government has been issuing Gold Sovereign Bonds (SGB) from time to time through the Reserve Bank of India. The RBI has announced issue of sovereign gold bonds for 2018 every month from October. The latest series of sovereign gold bonds issued by the Reserve Bank of India closed subscriptions last week. So what are sovereign gold bonds? Let’s find out.

Who can invest in SGB?

Any resident as per the provisions of Foreign Exchange Management Act can invest in these bonds. So an individual, HUF, trust whether a charitable one or not and universities can invest in SGB. Even investment on behalf of a minor can be made by his guardian. You need to have a PAN to be able to apply for the bonds. Though an NRI himself cannot invest in these bonds, he is allowed to hold bonds received by him as a nominee of a resident investor. The bonds can be bought from banks, stock holding corporations, post offices and recognised stock exchanges.

The application can be made in the minimum lot of 1 gram and in multiples of 1 gram. An individual and an HUF can invest up to 4 kgs in SGB in a financial year. Other eligible entities are can invest up to 20 kgs in a year. While computing the limits the investments made both through initial subscription and purchased made on stock exchanges, where the bonds are listed, will be taken into account. The bonds can be held jointly but for the purpose of limit, it will be computed with reference to the first holder.

Tenure and premature redemption

The gold bonds have a tenure of 8 years, but the investors can opt for early redemption after completion of 5 years on interest payment dates. The investors have the option to have the bonds is physical form or in demat form. Though the bonds have a lock-in period of 5 years, investors can always get out of the bonds by selling on stock exchange.

Issue and redemption price

Sovereign Gold Bonds are issued at a nominal rate per gram. The nominal rate of the bonds is computed on the basis of an average price of the 0.999 purity gold of last three days of the week preceding the week in which the bonds are issued and as published by the India Bullion and Jewellers. For the issue which opened on October 15 and closed on October 19, the issue price was Rs 3,146 per gram. There are more issues every month till February 2019. Investors who apply online are entitled to a discount of Rs 50 per gram. The bonds will be redeemed at the price of gold prevailing at the time of redemption. The gold price at the time of redemption will also be computed in the same manner as the issue price.

Bondholders are entitled to receive interest annually @ 2.50 per cent on the issue price of the bonds. The interest on the bonds is payable half yearly.

Taxation of interest

The interest received on the bonds is taxable in the hands of the investors. However, any profit earned on redemption of the bonds will be exempt from capital gains tax. Please note that the exemption from capital gains is only available at the time of redemption and not on the profits earned on sale on the platform of stock exchange. However, the benefits of indexation are available in case of sale before redemption for computing the capital gains.

Why should you invest?

As gold provides protection against inflation and affords liquidity in the time of political and economic instability, one should have some portion of his portfolio in gold. Since in India gold is gifted on all conceivable social occasions especially in marriages, one should invest in gold so as to have the gold readily available at the time. Since the investments in gold through these bonds earns you interest and makes profits at the time or redemption tax free, you should invest in the bonds. Even in emergency situations, one can get a loan against these bonds. So to that extent the bonds are more liquid than several other investment products.

The author is a tax and investment expert and can be reached at jainbalwant@gmail.com

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Balwant Jain
Balwant Jain

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