The Indian Government, after due consultation with the Reserve Bank of India (RBI), has taken a decision to issue Sovereign Gold Bonds across six tranches from May 2021 to September 2021. The motive behind this move is not just to decrease the demand for physical gold but also to channelize a part of domestic savings, earlier used for purchasing physical gold, into financial savings.
Introduction and Launch of Sovereign Gold Bond (SGB) Scheme
The SGB scheme was introduced in November 2015 as an initiative of the Indian Government. Governed by the Government Securities (GS) Act, 2006, these Gold Bonds are issued as Government of India Stock. However, the issuing authority for these bonds is RBI, acting on behalf of the government. The bonds are sold through various channels like Commercial banks, Stock Holding Corporation of India Limited (SHCIL), recognized stock exchanges including National Stock Exchange of India Limited and Bombay Stock Exchange, and designated post offices. These platforms facilitate the sale either directly or through agents.
Eligibility Criteria for Purchase
The SGBs have been made available for sale to specific categories, which include resident individuals, charitable institutes, universities, trusts, and Hindu Undivided Families (HUFs).
Features of Sovereign Gold Bonds
SGBs hold a strong link with gold prices of 999 purity (24 carats) as published by the India Bullion and Jewellers Association (IBJA), Mumbai, also known as the Issue Price. They can be acquired in multiples of one unit, up to certain thresholds set for different investors. For instance, retail (individual) investors and HUFs cannot acquire more than 4 kilograms (4,000 units) each within one financial year. Trusts and similar entities, on the other hand, have an upper limit set at 20 kilograms per financial year. The minimum permissible investment is 1 gram of gold.
One distinct feature of the gold bonds is their maturity period, fixed to be eight years. Nevertheless, an option to withdraw after the initial five years is available to the investor. Interest rates of 2.5% per annum have been marked which are payable semi-annually. As per the provision of the Income Tax Act, 1961, the interest acquired on Gold Bonds is taxable.
Advantages of Investing in SGBs
These bonds can serve as collateral for loans. An additional benefit is the exemption from capital gains tax on redemption of SGB, applicable to an individual. Redemption refers to the process when an issuer repurchases a bond at or before its maturity. Capital gain is the profit made on the sale of an asset like stocks, bonds, or real estate. It results when the selling price of an asset surpasses its purchase price.
Disadvantages of Investing in SGBs
Investment in SGB is considered long-term unlike physical gold that can be sold immediately. Though these bonds are listed on exchange, the trading volumes are low, causing difficulty for an investor to exit before maturity.
With this announcement, the government aims to promote financial savings by diverting the traditional trend of investing in physical gold towards more secure and profitable avenues like SGBs.
