The Reserve Bank of India, in consultation with the Government of India, issues Sovereign Gold Bonds from time to time in tranches. These bonds are a substitute for holding physical gold. Each of those tranches will be kept open for a specified period for investors to buy through banks, Stock Holding Corporation of India Limited (SHCIL), designated Post Offices, and recognized Stock Exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange. The advantage of these bonds compared to gold jewelry is as under.
Elimination of holding risk:
The buyers of Sovereign Gold Bonds (SGB) have multiple advantages compared to holding the physical form of gold. The investors will be issued a Holding Certificate (Form C) in lieu of a physical form of gold which can be held in the books of the RBI or in Demat form eliminating the risk of loss of script etc.
Price advantage over market price:
The price of sovereign Bonds will be fixed in Indian Rupees on the basis of the simple average of the closing price of gold of 999 purity published by the India Bullion and Jewellers Association Limited for the week (Monday to Friday) preceding the subscription period. The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value. The redemption price will be in Indian Rupees based on the previous week’s (Monday-Friday) simple average of the closing price of gold of 999 purity published by IBJA. Further, the advantage of gold bond compared to the jewelry form of gold is that it is free from making charges.
You earn interest on your investment:
Unlike physical gold, gold bonds provide you compensation for your investment at a fixed rate of 2.50 percent per annum payable semi-annually on the nominal value. The last interest shall be payable on maturity along with the principal.
Tax Benefit:
The interest on Gold Bonds shall be taxable as per the provision of the Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided for long-term capital gains arising to any person on the transfer of a bond. This exclusive tax benefit is not available in other options like gold ETF, gold funds, or physical gold.
However, the interest earned on the bonds is taxable as per the provisions of income tax rules. No TDS will be deducted from interest paid on bonds.
Loan facility:
Like gold loans, SGBs can be used as collateral for loans. The lien can be marked at the depository by the bank. For details click Advances against the security of Sovereign Gold Bonds (SGB)
Maturity / Encashment of bonds:
The bonds can be traded by the investor on exchanges/NDS-OM from a date to be notified by RBI. The maturity period of the bond is 8 years. However, the investors who want to encash/redeem the bond before the maturity period are allowed to encash after 5 years from the date of issue on coupon dates. The bonds can be transferred in the name of other eligible residents Indians. The investments in SGBs will be eligible for the Statutory Liquidity Ratio.
Who can buy Sovereign gold bonds?
The resident Indians (individuals, HUFs, Trusts, Universities, Charitable institutions, etc.,) as defined under FEMA Act 1999 are eligible to invest both in a single name or joint name. In the case of joint names, the buying limit applies to the first applicant. The bonds can also be purchased in the minor’s name.
Payment:
Payment can be made in cash up to a maximum of ₹ 20,000/- or Demand Drafts or Cheque or Electronic banking for buying these bonds. Where payment is made through cheque or demand draft, the same shall be drawn in favour of the receiving office.
Nomination facility:
Available. The nomination of and its cancellation shall be made in Form ‘D’ and Form ‘E’, respectively, in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007. The holder can nominate a second person, in addition to the existing one. On submission of a fresh nomination in Form ‘D’, it may be examined and dealt with in the same way as the original nomination.
Claim settlement:
If the claim is found to be in order, the name/s of the nominee/s will be substituted as the bond holder/s in place of the deceased holder – and a fresh Certificate of Holding will be issued under proper authentication. An individual Non – resident Indian may get the security transferred in his name on account of his being a nominee of a deceased investor provided that the nominee needs to hold the bonds till early redemption or till maturity, and the interest and maturity proceeds of the investment made by them shall not be repatriable.
Denomination:
The Bonds shall be denominated in units of one gram of gold and multiples thereof. The minimum investment in the Bonds shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March), provided that;
- in case of joint holding, the above limits shall be applicable to the first applicant only;
- The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market; and
- the ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions.
Risk factor:
If the gold rate in the market declines at the time of encashment of bonds the investor may incur a capital loss.
The maximum investment in terms of denominated gold units:
The Bonds issued will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram. The resident Indians can invest in units of one gram of gold or multiples thereof. The minimum investment in the Bonds shall be one gram with a maximum limit of subscription per fiscal year of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the Government from time to time. Further, the annual ceiling (that is in a financial year) will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market. In case of joint holding, the above limits shall be applicable to the first applicant only.
KYC norms: It is the same as applicable for the purchase of physical gold.
Eligibility for Statutory Liquidity Ratio:
The Bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone shall be counted towards the Statutory Liquidity Ratio. However, the investment ceiling will not be included for holdings as collateral by banks and financial institutions.
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