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Govt to come out with sovereign gold bonds starting 20 April at 2.5% interest: All you need to know about scheme

FP Staff

The government will issue sovereign gold bonds beginning 20 April offering an annual interest rate of 2.50 percent to domestic investors, the Reserve Bank of India said on Monday.

Sovereign Gold Bond 2020-21 will be issued by Reserve Bank India on behalf of the Government of India. "Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds. The Sovereign Gold Bonds will be issued in six tranches from April 2020 to September 2020...," the RBI said. "

The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram and the tenor of the SGB will be eight years with exit option after fifth year to be exercised on the interest payment dates.

"The Bonds will be restricted for sale to resident individuals, HUFs, Trusts, Universities and Charitable Institutions," the central bank said. The minimum permissible investment will be 1 gram of gold and the maximum limit of subscription shall be 4 kg for individual, 4 kg for HUF and 20 kg for trusts and similar entities per fiscal (April-March).

India's gold imports have plunged more than 73 percent year-on-year in March as record prices and the lockdown related to coronavirus squeezed retail demand.

The Government of India introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 to offer investors an alternative to own gold. It belongs to the debt fund category.

Over the years, the market has witnessed a considerable decline in the demand for physical gold. SGB not only tracks the import-export value of the asset but also ensures transparency at the same time.

SGBs are government securities and are considered safe. Their value is denominated in multiples of gold grams. SGBs has witnessed a significant increase in investors, with it being considered a substitute for physical gold, says Archit Gupta, founder and CEO, ClearTax.

If you are looking to purchase an SGB, all you have to do is approach a SEBI authorised agent. Once you have redeemed the bond, the corpus (as per the current market value) will be deposited to your registered bank account.

Why should I buy SGB rather than physical gold? What are the benefits?

The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

Gupta explains the schemes, eligibility and its benefits.

Here's all you need to know about the Sovereign Gold Bonds Scheme 2020-21

Eligibility Criteria Any Indian resident €" individuals, Trusts, HUFs, charitable institutions, and universities €" can invest in SGB. You may also invest on behalf of a minor.

Denomination/Value The value of the bonds is assessed in multiples of gram(s) of gold, wherein the basic unit is 1 gram. The minimum initial investment is 1 gram of gold, and the upper limit is 4 kgs of gold per investor (individual and HUF). For entities such as trusts and universities, 20 kgs of gold are permissible.

Tenure The maturity period of the bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates).

Interest rate The current interest rate for SGB is 2.50 percent annually. They are paid twice a year on the nominal value. Returns are usually linked to the current market price of gold.

Issuance of Bonds Only the Government of India Stocks (on RBI's behalf) can issue gold bonds as per the GS Act, 2006. Investors will receive a Holding Certificate for it. You can also convert it to Demat form.

KYC documentation You must follow the same Know-your-customer (KYC) norms when you buy physical gold. Hence, keep the KYC documents such as a copy of Driving License, PAN Card, Passport, or Voter ID with you.

Tax treatment The interest on Sovereign Gold Bonds is taxable as per the IT Act, 1961. In the case of SGB redemption, the capital gains tax applicable to an individual is exempted. Also, long-term capital gains generated are provided with indexation benefits to an individual or when transferring the bond from one person to another.

Eligibility for SLR If banks have acquired bonds after going through the process of raising lien, hypothecation or pledging, then they accounted for SLR. The capital a commercial bank has to retain before giving credit to customers is called Statutory Liquidity Ratio.

Redemption price The redemption price must be in rupees, based on an average of the closing price of gold of 999 purity in three previous working days.

Sales channel The government sells bonds through banks, Stock Holding Corporation of India Limited (SHCIL), and selected post offices as may be informed. The trading also occurs via recognised stock exchanges (National Stock Exchange of India or Bombay Stock Exchange) directly or through intermediaries.

Commission The receiving offices shall levy 1 percent of the overall subscription amount as commission for distribution of the bond. From this commission, they will share at least half with intermediaries (agents or brokers).

Advantages of Sovereign Gold Bonds >Absolute Safety Sovereign Gold Bonds carry none of the risks that are associated with physical gold, except the market risks. There is no hefty designing charge or TDS here. Therefore, nobody can steal it or change its ownership.

Extra Income You can earn a guaranteed annual interest at the rate of 2.50 percent (on the issue price), this is the most recent fixed rate.

Indexation benefit If you transfer your bond before maturity, then you can get indexation benefits. There is also a sovereign guarantee on the redemption money as well as on the interest earned.

Tradability You can trade gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing five years of investment, you can trade them on the National Stock Exchange or Bombay Stock Exchange, among others.

Collateral Some banks accept SGB as collateral/security against secured loans. Hence, they will treat it as a gold loan after setting the loan-to-value (LTV) ratio to the value of gold. The India Bullion and Jewellers Association Limited determines this.

Comparing SGB with Physical gold & Gold ETFs

sovereign gold bonds

In short, Gold Sovereign Bonds are new-age investment vehicles for those interested in the gold sector.

Also See: Coronavirus Outbreak: March gold imports hit six-and-half-year low on record price as lockdown squeezes retail demand: Report

Coronavirus Outbreak: Finance ministry allows states to borrow Rs 3.20 lakh cr from market

Gold prices ease from 4-week high as dollar, equities strengthen on signs of coronavirus slowdown

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