Gold Bonds Scheme: Details, Features, FAQs & Review

There are two types of Gold investors, those who like to own physical gold and those who are happy with paper gold because they just want the returns.

Up till now, for investors in non-physical gold, Gold funds were the most logical and hassle-free choice. Now, the Central Government has a better deal for these investors.

The Union Finance Minister Shri Arun Jaitley has announced several steps for monetizing gold in Budget 2015. These are;

• Sovereign Gold Bonds Scheme – The Finance Minister announced the development of an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold.
• Gold Deposit Scheme – Govt proposes to introduce ‘Gold Monetization Scheme’. This scheme will replace the existing Gold Deposit and Gold Metal Loan Schemes.
• Gold coins with Ashok Chakra – Government will also introduce Indian Gold Coin, which will carry the Ashok Chakra on its face. This may help in reducing the demand for coins minted outside India and also help to recycle the gold available in the country.

The Central Cabinet has recently approved the above schemes and issued detailed guidelines on these Gold Schemes. The main objective of these schemes is to curb gold imports and, at the same time, develop bullion / gold as an asset class in India.

In this post, let us understand about – What is Sovereign Gold Bonds Scheme (SGB)? What are the key features or highlights of Gold Bonds? What is the interest rate offered on Gold Bonds? Is Gold Bonds Scheme a good investment option? 

What is Sovereign Gold Bonds Scheme?

Sovereign Gold Bond Scheme is an indirect way of investing in Gold. Instead of buying Physical Gold, investors can invest in gold in a paper form through Sovereign Gold Bond Scheme. The under-lying asset for these bonds is Gold. These bonds will track the price of gold, plus an extra interest earning on top of that.

Gold Bonds Scheme: Features & Highlights

• Who will issue Sovereign Gold Bonds? – Bonds will be issued on behalf of the Government of India by RBI (Reserve Bank of India). These will be marketed through Post Offices / Banks / NBFCs (Non-banking Finance Companies) and by various brokers/agents (including National Saving Certificate (NSC) agents) who will be paid a commission. Bonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents. Commission for distribution shall be paid at the rate of 1% of the subscription amount.
• Who can buy Gold Bonds? – The sale of bonds would be restricted to Resident Indians / Resident Indian entities (HUFs, trusts, Universities, charitable institutions) only. So, NRIs (Non-Resident Indians) are not eligible to subscribe to Gold Bonds Schemes.
• How to buy Sovereign Gold Bonds? The Bonds will be made available both in Demat and Physical (paper) form. Gold Bonds will be issued on payment of Rupees and denominated in grams of Gold. The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
• Can a Minor invest in SGB? – Yes. The application on behalf of the minor has to be made by his / her guardian.
• Is it necessary for me to apply through my bank? – It is not necessary for you to apply through the bank where you have an account. You can apply through another bank or Post Office also.
• What is the minimum permissible investment in Gold bonds? Minimum permissible investment will be 1 unit (i.e. 1 gram of gold).
• Based on the Govt’s borrowing requirements, Gold Bonds will be issued in ‘Tranches’. (What is Tranche? – A Tranche refers to a single issue of a security released at different times. For example, the Govt may announce that it intends to issue Rs 1,000 cr in Gold Bonds in two TRANCHES of say Rs 500 cr.)
• The Gold bonds will be issued in denominations of 2, 5, 10, 50, 100, 500 grams of Gold. The cap (maximum limit) on Bonds that may be bought by an entity or an individual would be not more than 500 gms per person per fiscal year. A self-declaration to this effect will be obtained.
• Can I invest as a Joint-holder? Yes, in case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.
• How frequently Gold bonds will be issued? The Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification.
• What is the Gold Bonds’s Issue price ? Price of Bond will be fixed in Indian Rupees on the basis of the previous week’s (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).
• What is the rate of Interest on Gold Bonds? – The Govt will issue Gold Bonds with a rate of interest after taking into account the domestic and international Gold market conditions. So, the interest rate offered can vary from one tranche (Issue) to another. The investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.
• Interest earned on Gold Bonds is Taxable.
• How is interest calculated? – The interest amount is calculated on the value of the gold in rupee terms.
• What is the tenor / duration of Gold Bond? – The tenor of the Bond will be for a period of 8 years with exit option from 5^th year to be exercised on the interest payment dates. So, the lock-in period on Sovereign Gold Bonds is 5 years.
• What is the mod of investment? Payment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft.
• Can I hold Sovereign Gold Bonds in Dmat form?  The investors will be issued a Stock/Holding Certificate. The Bonds are eligible for conversion into demat form.
• Do I need to submit any KYC documents to buy Gold bonds? Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.
• Can I get loans on Gold Bonds? – Bonds can be used as collateral for loans. The LTV (Loan to Value) is to be set equal to ordinary Gold loan as mandated by RBI from time to time.
• Is Pre-mature withdrawal allowed? – Gold Bonds will be listed on Stock Exchanges to allow early exits.
• What the redemption rules on Gold bonds? – On maturity, the redemption is allowed in Rupee amount only. The principal amount of investment, which is denominated in grams of Gold will be redeemed at the prices of gold at that time. So, if gold prices have been appreciated then you can get the capital appreciation on the invested amount plus interest payment. The redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA.
• Can I extend the Tenor of the bond? – If the price of Gold has fallen from the time of investment was made, or for any reason then the depositor (Bond holder) will be given an option to roll over (extend) the bond tenure for 3 or more years.
• What is the main risk associated with Gold Bonds Scheme? – The investors will need to be aware of the volatility in Gold Prices. Though the scheme is guaranteed by the Government, do remember that you can get negative returns on your investment based on Gold price movements.
• Do I need to pay any charges to buy Gold Bonds? – As an investor, you do not have to pay any charges / fees.
• Government will maintain ‘Gold Reserve Fund’ to take care of risk of increase in Gold prices which will be borne by the Govt itself.
• Can I gift bonds? – The bond can be gifted/transferable to a relative/friend/anybody.

Sovereign Gold Bonds Scheme & Tax Implications

The Capital Gains tax treatment on Gold Bonds is proposed to be the same as for Physical Gold for an individual investor.

• According to the Budget 2016 proposals, gold bonds will be exempted from capital gains (LTCG) tax at the time of redemption. So, if you hold the bonds till the maturity date and if you make any long term capital gains when redeeming your gold bonds, there will not be any capital gain taxes on the profit you make.
• Kindly note that Long term capital gains arising to any person on sale or transfer of SGB will continue to be taxable and eligible for indexation benefits. You need to hold the Gold Bonds for at least three years to be termed as ‘Long Term Capital Asset’. The LTCG (Long Term Capital Gains) if any is taxed at 20% with indexation.
• If you redeem bonds before completion of 36 months (3 years), you have to pay tax on STCG (Short Term Capital gains) which is as per your Income Tax slab.
• The interest on Gold Bonds shall be taxable. TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.

Should you invest in Sovereign Gold Bonds? – My Opinion

The main benefit of Gold bonds is you may get capital appreciation (if gold prices increase) plus ‘interest payment’ on bonds. If you buy physical gold or Gold ETFs (which also track gold prices), you may get capital appreciation only. Neither physical gold, gold mutual funds nor gold ETFs pay any interest rate.

Latest News on Gold Bond Public Issues

• (09-October-2017) : Latest Gold Bonds issue Oct to Dec 2017. For more details, you may kindly read this article..
• (25-February-2017) : Gold Bonds Issue Feb 2017. The Govt has proposed to offer 7th Tranche of Sovereign Gold Bonds in Feb 2017. The Applications for the 7th Tranche of Gold bonds will be accepted from February 27 to March 3, 2017. The Bonds will be issued on 17th Mar, 2017.
• (21-October-2016) : Gold Bonds FY 2016-17 – Latest Public Issue – Applications for the proposed sixth tranche of ‘Sovereign Gold Bonds Scheme’ will be accepted from 24th October, 2016 to 2nd November, 2016. The Gold bonds will be issued on 17th November, 2016. The Issue price has been fixed as Rs 3,007 per gram. However, the Govt has decided to issue the Gold bonds at a discounted price of Rs 2,957 per gram (a discount of Rs 50).
• (31-August-2016) : Gold Bonds FY 2016-17 – Public Issue – Applications for the proposed Fifth tranche of ‘Sovereign Gold Bonds Scheme’ will be accepted from 1st September, 2016 to 9th Sep, 2016. The Gold bonds will be issued on 23rd Sep, 2016. The issue date of the Sovereign Gold Bonds has been shifted from 23rd September,2016 to 30th September, 2016. (Posted on 23-Sep-2016)
• (18-July-2016) : Applications for Fourth tranche of ‘Sovereign Gold Bonds’ will be accepted from 18th July to 22nd July, 2016 (1st issue in Financial Year 2016-17). The bonds will be issued on 5th August, 2016. Click here to read the latest article on Gold Bonds.
• (05-March-2016) : Applications for Third tranche of ‘Sovereign Gold Bonds’ will be accepted from 8th March to 14th March, 2016. The bonds will be issued on 29th March, 2016.
• (15-Jan-2016) : Applications for Second tranche of ‘Sovereign Gold Bonds’ will be accepted from 18th Jan to 22nd Jan, 2016. The bonds will be issued on 8th Feb.
• (03-Nov-2015) : RBI fixes Gold Bonds Issue Price at Rs 2,684 per gram.
• (30-Oct-2015) : Govt fixes ‘Interest rate’ on Gold bonds at 2.75% . These gold bonds will be sold through Banks & Post Offices.

If you buy Gold mutual funds or Gold ETFs, you have to bear ‘fund management charges’. In case of Gold bonds, no charges are applicable. Also, like gold funds and ETFs, you don’t have to worry about storage of physical gold or pay locker fees in case of Gold Bonds.

The biggest disadvantage of Gold bonds is lack of liquidity. The proposed tenor is around 5 to 7 years. So, if you want to exit bonds before the maturity date, the only option is you have to redeem them through the exchanges. So, we need to wait and watch the extent of trading of these bonds on National Stock Exchanges. (Do note that you can redeem gold mutual funds and get the redemption amount in 2 to 3 days).

In India, most of us prefer buying physical gold to paper gold. It would be very challenging to make individuals switch from buying physical gold to a paper which promises gold like returns.

I believe that liquidity, tax treatment, rate of interest and marketing efforts to reach out the rural investors could be the deciding factors for the success of Gold Bonds Scheme. Also, Gold bonds scheme may turn out to be successful when compared to Gold Deposit or Monetization Scheme.

Personally, I have never invested in Gold. The extent of volatility of Gold prices in the recent years is more than that of Equity securities. So, the risk-reward ratio is certainly not in favor of investing in Gold.

However, if you would like to invest a portion of your savings in Gold for long-term, Gold bonds Scheme may outscore the Gold funds / physical gold.

Do you expect Gold Bonds Scheme to be a game changer? Will this scheme reduce Gold imports? Kindly share your views and comments.

(Picture courtesy : The new Indian Express. Reference : PIB)  (Featured Image courtesy of Master isolated images at FreeDigitalPhotos.net)