Why invest in Sovereign Gold Bond (SGB) scheme?
From 18-22nd January all the application regarding Sovereign Gold Bonds shall be accepted by the banks, post offices and Stock Holding Corporation of India Ltd. All the banks designated by the Stock Holding Corp of India Ltd will be selling these bonds. This scheme is an alternative for the citizens in place of solid physical gold. These bonds hold equal value as that of solid physical gold. Let’s further understand how this mechanism operates.
Explaining Sovereign Gold Bond (SGB) and who can be the issuer
SGB are the securities issued by the government of India and is issued in grams. The RBI issues these grams of gold equivalents to the investors with all the authorities permitted by the government.
The investors can purchase these bonds at the issuing price. The maturity time frame of this bond is eight years and the freezing period is 5 years for the investors. They can earn an interest rate of 2.75%per annum. The interest is paid to the investors semi- annually and is computed on the initial value of bond. The interest earned is also taxable, moreover, the value of the bond remains the same as it was on the day of investment and the gold rate is also constant. Hence the value on which the interest is calculated remains constant.
Only at the time of redemption of the bond, the payment is done, considering the value of gold as on that date computing the average of the gold closing price for that subsequent week. The investors are liable to pay capital gains after redeeming the bonds.
Example to explain how the SGB works
You can invest in 10 grams of the SGB bonds instead of investing by producing 10 grams of real gold. The tenure of this investment is for eight years. After the maturity of the investment you will be payed according the value of 10 grams of gold as on that date. The only benefit that the investors gain from this investment is that they earn an interest of 2.75% on the initial value of the bond. After accumulating this interest, the investors earn around 25 % interest on the investment value. If for example there is a hike in the gold prices by 2% then the interest earned annually becomes 4.75% for the investors. If an investor buys bonds of Rs. 26,000 then the price of the investment sums to one and a half times in eight years. The investors will earn Rs. 42, 200 if the hike in gold prices is of Rs. 13,400. This figure also has the interests accumulated on Rs. 26000.
Hence earning more than 25% benefits in eight years is any day better than buying physical gold.
Benefits of SGB over physical gold. Why to invest in SGB?
The Gold bond schemes are like an alternative for real solid gold. The investors can earn interest and is different from gold ETFs. In a study done by the World Bank, 20000 tonnes of physical gold is under the custody of the Indian citizens.
There are no issues such as deduction of making charges that is the scenario when the gold is in the form of jewelry.
The investment of the investors is safe and they are paid according to the gold rate at the time of redemption.
The bonds are safe with RBI and are preserved in demat form so that there is no risk and loss involved.
The investors enjoy an interest of 2.75% added with the increase in the value of Gold. These compounded benefits are alluring for the investors. These bonds are the best gifts for family and friends. These bonds can be utilized as collateral for loans.
Common RBI FAQ on Sovereign Gold Bond Scheme 2015
|1||Was the SGB released earlier?
|This scheme was launched on 5th of November by our prime minister. This will reduce the amount of money that is invested in physical gold. Moreover, around 20000 tonnes of gold lies with the Indian households and the value of this is USD 800 billion. The subscription of the gold bonds will start from November 26. The price of each bond will be 2,684.
The first sovereign gold scheme got 915.953 kg of gold. This was not as high as it was expected. The reason was that the prices of gold had drastically fallen after the prices were fixed by the RBI and when they were open in the market. Hence there was discount offered of Rs. 149 on each gram of gold as the price has gone down to 2545. It is also not advisable for the investors to invest in these bonds. There were 10 banks who were issuing the gold bonds.
|2||What are the possible risks of SGBs?
|If the price of the gold falls, there is capital loss in the market. But the units that were invested remain the same irrespective of the fluctuation.|
|3||What is the maximum number of bonds one can buy?
|The gold bonds can be purchased in units of one gram gold. Any investor needs to buy minimum two grams of gold and the maximum limit of investment is 500 grams in one fiscal year.|
|4||What is the tenure for maturity of these loans?
|The bonds can be redeemed after eight years from the date of investment and the freezing period is 5 years. They can only be redeemed after completion of the fifth year.|
|5||Where are these available for purchase?||The bonds can be purchased from Stock Holding Corporation of India Ltd, designated banks and post offices. The distributors earn an income of 1% in the form of commission on the total investment value.|
|6||Who can invest in these bonds?||All the residents of India including HUFs, trusts, universities and charitable institutions can invest in these Gold bonds. If the investor is minor, then the investment can be done jointly with a major.|
|7||Can there be a nomination of the Gold bonds?||Yes nominations can be done under the provision of Government Securities Act 2006 and Government Securities Regulations, 2007. A nomination form needs to be filled at the time of investment.|
|8||What proof will I have of investment in Gold bonds?||A certificate of Holding is issued to the investor on the date of issuing the bonds. This certificate can be collected from all the designated bodies and even from RBI through an e-mail. This is only possible when the investor produces the e-mail address in the application form|
|9||Is there any tax implication on the interest?||The interest on the bonds is paid to the investor after every 6 months and the last installment of interest is paid after maturity of the bonds. The interest is taxable as per the norms of Income-tax Act, 1961(43 of 1961).|
|10||What will be the tax deduction on capital gains?||If the investor exits through exchange, then the capital gains are taxed according to the tax slab prior to 3 years and at the rate of 20% after 4 years. The tax treatment will be the same as in case of physical gold.|
|11||Is TDS calculated at the time of application?||No Tax is applied at the time of application but it is the responsivity of the investor to comply with the taxation norms.|
|12||Can the bonds be redeemed before maturity?||The complete maturity time frame for the gold bonds is 8 years but the investors can redeem their loans after the fifth year. The bond can be exchanged if it is in demat form. The bonds can also be transferred and are also sold according to the norms of the Government Securities Act.|
|13||What are the formalities at the time of redemption of the bonds?||If the bonds are redeemed before the maturity date, you need to visit the designated institutions of the agent thirty days prior to the coupon payment date. The request for redeeming the bonds before maturity is only entertained is the investor visits the bank/ post office a day prior to the payment date of coupon. The amount is then credited to the investor’s bank account.|
|14||What are the procedures that need to be followed at the time of redemption?||The investors are informed a month prior to the date of maturity. Once the bonds are mature, the amount is credited in the account of the investor.
In case of any change in the details of the investor, a prior notification needs to be sent to the bank or post office.
|15||If the price of the bonds fixed?||The value of the bonds is fixed in rupees and is calculated on the average of previous week’s closing price of gold which is issued by the India Bullion and Jewellers Association Ltd. At the moment RBI has fixed the amount of each gram of gold to 2600. During November the price value was Rs.2684 for each unit.|
|16||Is the amount of maturity fixed?||The amount is not fixed as the prices are fluctuating according to the demand and supply in the market. The maturity price is based on the average of the closing amount of 999 pure gold. This is the procedure that is abided at the time of maturity.|
Comparison between SGB and ETF
The rate of interest that the investors earn on bonds are higher as compared to ETFs. In case of ETF the investors need to pay an additional fee to the asset management company for holding the gold which is around 1% charged annually. Hence the returns are less in case of ETFs. Since the earnings are confined, the ETF is not as alluring as the gold bonds. In case of Gold bonds no such additional costs need to be paid by the investors. The investors do not exit the ETF till the value of the bonds is as high as expected. But in the case of Gold bonds the investor enjoys a minimum interest of 2.75% on the investment every year. But the gold bonds are not as liquid as ETFs and there are tax implications as well. The investors can only exit after 5 years and the maturity period for gold bonds is 8 years. There is also a check on the maximum amount of investment as 500 grams.
Why Gold bonds?
If gold is a necessary investment for you and you feel that it is advisable to invest in gold, then Gold bonds are the best investment for you. If you buy physical gold in the form of gold bars and do it only for investment for your future. Moreover, if you are not worried about the liquidity in terms of time frame and can forget the investment for eight years, then you should invest in gold bonds. You will earn the same benefits but also you will be paid an interest of 2.75% on the value of investment every year. This is the safest way of investment as there are no risks attached to it.