Recently, the Reserve Bank of India (RBI) has announced a plan to sell sovereign gold bonds (SGBs) — government securities denominated in grams of gold.
About Sovereign Gold Bond
- Gold bonds bear interest at a fixed rate of 2.50% per annum on the amount of initial investment which will be credited semi-annually.
- Bonds are sold through offices or branches of nationalised banks, private banks, foreign banks, designated post offices, Stock Holding Corporation of India Ltd. and the authorised stock exchanges either directly or through their agents.
- On maturity, the gold bonds will be redeemed in Indian rupees and the redemption price will be based on a simple average of closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by IBJA.
- Although the tenure of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year, on coupon payment dates.
- The bond will be tradable on exchanges, if held in demat form.
- It can also be transferred to any other eligible investor.
Will prices rise, and should you invest in gold?
- While higher US bond yields and strengthening of the dollar put pressure on gold, leading to a fall in prices since the beginning of the calendar year.
Why should an investor buy gold bonds rather than physical gold?
- The quantity of gold the investor pays for is protected, since he receives the ongoing market price at the time of redemption/premature redemption.
- The bonds offer a superior alternative to physical gold.
- The risks and costs of storage are eliminated. Investors are assured of the market value at the time of maturity, and periodical interest.
- Sovereign Gold Bond are free from issues like jewellery making charges and purity.
- The bonds are held in RBI books or in demat form, eliminating the risk of loss of scrip etc.
What are the minimum and maximum limits for investment?
- The bonds are issued in denominations of 1 gram of gold and in multiples thereof.
- The minimum investment will be 1 gram, with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April–March).
Can these securities be used as collateral for loans?
- They can be used as collateral for loans from banks, financial Institutions and non-banking financial companies (NBFC).
- The loan-to-value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time.
- Granting loans against SGBs would be subject to the decision of the bank/financing agency, and cannot be inferred as a matter of right.
What are the tax implications?
- Interest on the bonds will be taxable as per the provisions of the Income-Tax Act, 1961 (43 of 1961).
- The capital gains tax arising on redemption of SGB to an individual has been exempted.
- Indexation benefits will be provided to long-term capital gains arising to any person on transfer of bonds.
- TDS is not applicable on the bonds, but it is the responsibility of the holder to comply with tax laws.
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