Why Invest In Gold Sovereign Bonds- (PHYSICAL GOLD ALTERNATIVE!!)

Why one must Invest In Gold Sovereign Bonds issued by RBI on behalf of Government of India than choosing physical gold?  I wrote about all the investment options in gold in India like Gold ETF, E-gold, Reliance My Gold Plan, Gold Mutual funds some time back.  Now a new and better investment option for investors in gold is available in the form of Sovereign gold bonds.  These new bonds are launched this month by Prime Minister Narendra Modi for the residents of India.  They carry the benefit of returns similar to physical gold along with additional 2.75% interest rate which is paid every 6 months to investors of these bonds.

Important Features of Gold Sovereign Bonds:

  • 1st Tranche Opens on 5th November 2015 and closes on 20 Nov 2015
  • Minimum investment is 2 grams of gold and maximum is 500 grams (1 gram = 2684 rupees)
  • They carry the Central Government’s guarantee for capital invested and Interest accrued.
  • Tenure is 8 years with option to exit after 5th year. Also investor can trade on exchanges
  • Bonds can be issued in physical or demat form as per investor requirement
  • Interest at 2.75% PA and is paid for every 6 months directly in bank account.
  • Can be bought with Cheque / Cash / Online Transfer or DD
  • Maturity Price is equivalent to market value (at the time of maturity) of grams of gold originally invested in rupees.
  • NO TDS is debited.
  • Loans can be availed against the bonds as collateral.
  • They can be transferred or gifted before the maturity of the bonds.

What is Gold Sovereign Bond?

These are similar to other bonds issued by Government but are denominated in terms of gold in grams.  Normal bonds are denominated in rupees.  These are issued and managed by Reserve Bank of India (RBI) on behalf of GOI.  They give similar returns to that of holding physical gold.  Further investors invest in gold sovereign bondsneed not to worry about theft, loss etc.,  They are managed by RBI in their books and investors can hold them in their demat accounts too.

They offer two benefits

  1. Give similar return to that of gold.
  2. Offer an interest of 2.75% PA along with appreciation in gold and interest is paid half yearly.

To understand it better let us assume investor A purchases physical gold of 10 grams at Rs 2684. Investor B invests in the gold bonds of Government.  Both invested for a period of 8 years.  Also it is assumed that price of gold increased 8% every year for next 8 years.  If we compare both, Investor B will have gold worth of around 49679 rupees same as Investor A.  But Investor A will be getting an interest of around 366 rupees for every six months in his bank account from government.  This is major advantage along with other benefits of no making charges, wastage charges etc.,  At the time of maturity, investors will be paid the cash. It is equivalent to the market value of gold at the time of maturity. In other words if an investors buys 10 grams of gold by investing in gold sovereign bonds, they will be able to buy 10 grams of gold even after 8 years irrespective of price on that.  If gold price per gram after 8 years is 10000 (just an assumption), then investor will get 10000 rupees for each gram of gold they hold in the bond.  If gold price is 1000 rupees (Again an assumption), maturity amount will be 1000 rupees only. So returns on these bonds are pegged to gold price and as a bonus 2.75% of interest PA which is paid every 6 months during the tenure of the bond.

comparision of investmens in physical gold and gold sovereign bonds

Who can Invest In Gold Sovereign Bonds ?

One can invest in sovereign gold funds by visiting their nearest designated banks branch / agent  or post office where the applications are accepted.  All resident Indians as per FEMA 1999 definition are eligible to apply for it who includes Individuals, Trusts, HUF, Charitable trusts and universities. Even minors can invest in sovereign gold bonds. In the case of minors application has to be made by his guardian and by providing valid age proof like birth certificate along with attested copy.  Also KYC requirement is similar to as if one buys physical gold.  KYC will be done where the application is submitted.  Investors need to submit their identity proofs like PAN, AADHAR, Voter ID, PassPort, TAN etc.,  The bonds can even be transferred or gifted who fulfill this eligibility conditions.

Applicable Limits on Invest In Gold Sovereign Bonds

An investor should buy a minimum of 2 grams of gold to Invest In Gold Sovereign Bonds.  Maximum buying limit is 500 grams.  These limits are based on Financial Year Basis ie from April – March.  As mentioned earlier, these are issued in denominations of 1 gram and in multiples of 1 gram after that.  Although denomination is 1 gram, minimum investment amount is 2 grams.  If two or more joint holders are applying, then the limit is applicable for only first holder.  If a family has 3 members, each member who fulfill the eligibility can buy 500 grams each of gold every financial year.  Further one can be assured of allotment if not disqualified otherwise.

How the price of these bonds determined for investment and maturity?

The price is average price of last working week (monday-friday) as declared by IBJA (India Bullion and Jewellers Association Ltd) for 999 purity gold.  This method of calculation is applicable.  For the initial trench of gold sovereign bonds the price is fixed at 2684 rupees per gram.  Similarly, at the time of maturity of the bonds, price of the gold will be average price of gold prior week (monday to friday).  This method of calculation is transparent.  Investors will get the amount in rupees for number of grams of gold they hold X price of 999 purity gold at that time.  By redeeming their bonds investors will be able to buy same grams of gold for which they are investing now.  If an investor buys 50 grams of gold now after 8 years he will be able to buy same 50 grams irrespective of gold price at that time. Redemption amount and interest will be credited to bank account directly.  If units are held in demat then it can be in the bank account linked with demat account.

Exit options in gold sovereign bonds

Maturity period of these bonds are for 8 years.  Holding them after this time will not get interest on it.  Options are also available for pre mature exit from these bonds after 5 years.  These bonds will also be available for trading from the date as specified by RBI.  So investors can exit them on exchanges at any time.  They can also be transferred and gifted which is another exit option for investors in this.  Even partial withdrawal in multiples of gram is allowed.  In case of requirement the bonds can be offered as collateral for availing loans.  LTV (Loan To Value) ratio is same as applicable for availing loan on physical gold which is specified by RBI from time to time.

Tax Benefits

Although TDS is not debited on interest, investors are liable to pay tax as per applicable provisions.  Interest paid on these bonds IS taxable.  Capital gains on the bonds will be treated similar to that of physical gold. In regard to tax treatment for these bonds the following is quoted. Please note the word Consider in the quote below.

“The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption.”

One must consider Invest In Gold Sovereign Bonds if their purpose is to accumulate gold for some distant event like child marriage etc.,  This has many advantages including peace of mind from theft, Government assurance for capital and interest, redemption value which is at future gold price on the date of redemption and best of all 2.75% interest which is paid half yearly.



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