The Reserve Bank of India, in consultation with Government of India, issues Sovereign Gold Bonds from time to time in tranches. 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 recognised Stock Exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange. The advantage of these bonds compared to gold jewellery 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 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 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 previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity published by IBJA. Further, the advantage of gold bond compared to the jewellery form of gold is that it is free from making charges.
You earn interest on your investment:
Unlike physical gold, the gold bonds provide you compensation on your investment at a fixed rate of 2.50 per cent per annum payable semi-annually on the nominal value. The last interest shall be payable on maturity along with the principal.
The interest on Gold Bonds shall be taxable as per the provision of 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 to long term capital gains arising to any person on the transfer of bond.
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.
Like gold loans, SGBs can be used as collateral for loans. The lien can be marked at the depository by the bank.
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 is 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 resident Indian. The investments in SGBs will be eligible for Statutory Liquidity Ratio.
Who can buy the gold bonds?
The resident Indians (individuals, HUFs, Trusts, Universities, Charitable institutions etc.,) as defined under FEMA Act 1999 are eligible to invest both in single name or joint names. 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.
If the gold rate in the market declines at the time of encashment of bonds the investor may incur the capital loss.
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 above bonds with the minimum investment in gold units of two grams. The maximum buying limit allowed to a person per fiscal year is 500 grams of gold units. The limit of 500 grams per financial year is applicable even if the bond is bought on Exchanges.
Nomination facility: Available
KYC norms: It is same as applicable for purchase of physical gold.
Eligibility for Statutory Liquidity Ratio – Bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone, shall be counted towards Statutory Liquidity Ratio.
Finance Ministry in its statement on July 27, 2017, announced that the investment limit for individuals and HUF on Sovereign Gold Bonds is increased to 4 K.G per fiscal year from the existing limit of 500 gms per year. The investment limit for Trusts and similar entities notified by the Government from time to time is increased to 20 KG per fiscal year. The bonds purchased in the secondary market is also included in the ceiling limit. However,investment will not include holdings as collateral by banks and financial intitutions.
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