All about sovereign gold bond scheme

The asset class that has given the maximum returns in the last 12 months is, surprisingly, neither equity nor real estate, but gold. Gold with a return of 22% has given the highest return among all asset classes. Investors are showing a renewed interest in investing in the yellow metal and participate in the price rally.

While the appetite of investors for physical gold has waned of late, they, on the other hand, are showing a keen interest in investing in gold in electronic form like gold ETFs.

The flip side though is that you should have a Demat account to buy gold ETFs. So how can you invest in gold if you do not have a Demat account and you do not want to buy gold in the physical form. T

he alternative is the Sovereign Gold Bond Scheme. Here is a low down on Sovereign Gold Bonds or SGBs.

SGBs are bonds denominated in grams of gold issued by the Reserve Bank on behalf of the Government of India. The RBI has been issuing gold bonds every year in tranches since 2015. The subscription period for the next tranche viz. Series VII is from December 2 to December 6, 2019.

The SGB offers a superior alternative compared to holding gold in physical form. The risks like theft or burglary, purity and costs of storage or loss on conversion associated with physical gold are eliminated.

You will not only get the market price of gold at the time of maturity but also get periodical interest during the tenure of bonds. As the bonds are held in the books of the RBI or in the demat form, the risk of loss of scrip etc is eliminated.

Who is eligible?

All resident Indians as individual or on behalf of a minor child, or jointly with any other individual and other entities like HUFs, Trusts, Universities and Charitable Institutions are eligible to invest in this scheme.

Features of SGB Scheme

The Bonds will be denominated in grams of gold with one unit equal to one gram. While you can invest a minimum of one gram of gold, the maximum limit is four kgs for individuals & HUF and twenty kgs for trusts and similar entities per financial year as notified by the Government from time to time.

You need to give a self-declaration to this effect. In case of joint holding, the investment limit will be applied to the first applicant only. Bonds will have a tenure of eight years with exit option in the fifth, sixth, and seventh year. You have to exercise the exit option on the interest payment dates.

At what price are Bonds sold?

RBI will issue Press Release stating the relevant issue price of the gold for the respective tranche before any new Issue. The price of Bond will be fixed in Indian Rupees based on simple average of closing price of gold of 999 purity published by the India Bullion and Jewelers Association Limited (IBJA) for the previous three business days of the week.

The issue price for Series VI was Rs 3785 per gram. You can also get a discount of Rs 50 per gram on the issue price if you apply online through the website of the listed scheduled commercial banks and make the payment through digital mode.

You can make payment for the Bonds through demand draft or cheque or electronic banking and you will get a Holding Certificate for the same. You can also hold the Bonds in digital form if you have a demat account. Bonds are sold through branches of Banks, Post offices, Stock Holding Corporation of India (SHCIL) and authorized stock exchanges.

The USP of the scheme

Investing in SGB is superior compared to Gold ETFs, as you will also be paid an interest of 2.50% (fixed rate) per year on the amount of initial investment. Interest will be credited semi-annually to your bank account and the last interest will be paid on maturity along with the principal. Though the tenure of the bond is 8 years, you can redeem the bonds after the fifth year from the date of issue on coupon payment dates. The bonds will be tradable on Exchanges if held in the demat form and can be transferred to any other eligible investor.

Tax aspects

While Tax Deduction at Source (TDS) is not applicable to bonds, interest is taxable as per the provisions of the Income-tax Act, 1961. you do not have to pay long-term capital gains tax on the gains if you hold them till maturity. You can also claim indexation benefits if you redeem them after five years. Nomination and loan facility is also available. And with other benefits highlighted elsewhere here, investment in SGB is a boon for investors.

(The writer is a CFA, a former banker and currently teaches at Manipal Academy of Banking, Bangalore)