As a part of the Government’s efforts to fight the devastation caused by the Coronavirus Pandemic induced lockdowns, the Government of India has announced a new issue of Sovereign Gold Bonds over the year 2020-2021.
Everyone’s been talking about this series of Bonds and whether or not you should invest. If you’re looking to understand what Sovereign Gold Bonds are or invest in them, this article is for you.
Let’s get started!
What Are Sovereign Gold Bonds (SOVEREIGN GOLD BONDS)?
A Sovereign Gold Bond is a security issued by the RBI on behalf of the Indian Government. It is a Bond, the price of which is linked to the price of Physical Gold. It allows an investor to invest in Gold without the requirement for physically holding the Gold purchased or carrying out any inspection checks. SOVEREIGN GOLD BONDs are denominated in Grams of Gold and the minimum subscription quantity is 1 Unit i.e. 1 Gram of Gold.
What are the sources of Income from a SOVEREIGN GOLD BOND?
In SOVEREIGN GOLD BONDS, you can earn money from 2 sources:
Interest Income at 2.5% p.a. paid on semi-annually and
Capital Gains Income from the appreciation in price of gold at the time of redemption/exiting the investment.
How Is the Price of a Unit in the SOVEREIGN GOLD BOND determined for Application Purposes?
The price of a unit in SOVEREIGN GOLD BONDs is directly linked to the price of Gold.
2 Days prior to the opening of the subscription for a specific tranche of SOVEREIGN GOLD BONDs, the RBI posts the pricing for the same on their website.
The bond issue is priced by at the average closing price of gold (having 999 purity) during the last 3 working days of the week preceding the subscription date as are published by the India Bullion and Jewelers Association on their website.
How Is the Price of a Unit in the SOVEREIGN GOLD BOND determined for Redemption Purposes?
The value of each unit of a SOVEREIGN GOLD BOND is determined in the same manner as discussed above at the time of the Redemption of the Bonds.
What is the tenor of the Bond?
The bonds are issued for a period of 8 years. However, they offer an early exit option after the 5th year which is known as a pre-mature withdrawal. An investor can opt for a pre-mature withdrawal only on the day of the Interest Payments.
What are the minimum and maximum subscription quantities for SOVEREIGN GOLD BONDS?
The minimum subscription quantity in a SOVEREIGN GOLD BOND is 1 unit i.e. 1 gram of Gold.
An Individual/HUF can purchase a maximum of 4Kg of Gold or 4000 units of SOVEREIGN GOLD BOND in a given Fiscal Year.
A trust or other permissible investors can purchase a maximum of 20Kg of Gold in a given fiscal year.
What are the terms of Taxation applicable to an investment in SOVEREIGN GOLD BONDS?
The Interest Received from the SOVEREIGN GOLD BONDS is taxable as per the normal income tax rate of the investor.
Long term capital gains arising on redemption of the Bonds are exempt from tax.
In the case of pre-mature redemption of the bonds, the capital gains will be taxed as Long Term Capital Gains and indexation benefit will be provided for the same.
Comparing Investment Options – Physical Gold vs SOVEREIGN GOLD BONDS:
Considering the SOVEREIGN GOLD BONDS are investment securities that depend upon the physical commodity of Gold for their value, one needs to understand the differences between both as investment options.
Investment in SOVEREIGN GOLD BONDs is subject to a fixed interest income of 2.5% p.a. of investment amount on a semi-annual basis but investments in Physical Gold do not come with such benefits.
When investing in SOVEREIGN GOLD BONDs, concerns regarding making charges and purity of gold are eliminated as opposed to investing in Physical Gold where they are a major concern.
Tax treatments for both vary.
What is the schedule for issuance of SOVEREIGN GOLD BONDS by the Government of India?
In the fiscal year, 2020-2021, the Government of India has announced 6 tranches of SOVEREIGN GOLD BONDs for Investment Purposes. The schedule is as follows:
Date of Subscription
Date of Issuance
2020-21 Series I
April 20-24, 2020
28th April 2020
2020-21 Series II
May 11-15, 2020
19th May 2020
2020-21 Series III
June 8-12, 2020
16th June 2020
2020-21 Series IV
July 6-10, 2020
14th July 2020
2020-21 Series V
August 3-7, 2020
11th August 2020
2020-21 Series VI
Aug 31 – Sept 4, 2020
8th September 2020