The Government of India, in conjunction with the Reserve Bank of India (RBI), declared plans to issue Sovereign Gold Bonds (SGBs) in tranches for 2022-23. The SGB scheme was introduced in November 2015 with a primary objective to decrease demand for physical gold and shift a portion of domestic savings used for purchasing gold into financial savings. During the Covid-impacted years, the investment in SGBs surged as investors sought safer alternatives amid the equity market’s volatility. 2020-21 and 2021-22 accounted for approximately 75% of the total bond sales since the scheme’s inception.
Issuance and Eligibility of Sovereign Gold Bonds
Under the Government Securities (GS) Act, 2006, the Gold Bonds are issued as Government of India Stock, with the RBI issuing them on behalf of the Government. Commercial banks, the Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognized stock exchanges sell the bonds either directly or through agents. The sale of bonds is restricted to resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
Features of Sovereign Gold Bonds
The price of gold bonds is linked to the price of 999 purity (24 carats) gold, as published by the India Bullion and Jewellers Association in Mumbai. They can be purchased in multiples of one unit, with certain upper thresholds set for different types of investors. For retail investors and HUFs, the limit is 4 kilograms per financial year, while for trusts and similar entities it is 20 kilograms. The minimum permissible investment is 1 gram.
The bonds carry an eight-year maturity period, with an option for investors to exit after the first five years. A fixed interest rate of 2.5% per annum is imposed, payable semi-annually, and the interest on Gold Bonds is taxable under the Income Tax Act, 1961 provisions. These bonds can also be used as collateral for loans.
Benefits and Disadvantages of Sovereign Gold Bonds
If an individual redeems SGBs, they are exempted from capital gains tax. However, sovereign gold bonds are seen as long-term investments, unlike physical gold, which can be instantly sold. Although they are listed on the exchange, these bonds have low trading volumes, making it difficult to exit before maturity.
Objective of the Sovereign Gold Bond Scheme and Gold Monetization Scheme
The Sovereign Gold Bond Scheme and the Gold Monetization Scheme were introduced in 2015, aiming to mobilize the gold held by households and institutions in the country, provide a boost to the gems and jewellery sector by making gold available as raw material on loan from the banks, and reduce reliance on gold imports over time to meet domestic demand. However, promoting foreign direct investment in the gold and jewellery sector is not an objective of these schemes.
