What is Sovereign Gold Bond scheme?

The Government has launched Sovereign Gold Bonds Scheme that offers people and entities to invest in government bonds denominated in gold values. Prime Minister has launched three gold related investment programmes simultaneously – the gold monetization scheme, gold coin scheme and the gold bond scheme in November 2015. All these programmes were aimed to meet investment appetite/physical demand for gold in different ways and thus aimed to reduce gold imports.

What is Sovereign Gold Bond Scheme (SGB)?

Sovereign Gold Bonds are government securities or bonds denominated in fixed grams of gold. Investors have to pay the price for bonds in cash equivalent to the present value of gold (prevailing gold price). The price of bonds is expressed in terms of 1-gram gold, 2-gram gold etc. Understandably, the price of bond depends upon the quantity of gold denominated.

Who is eligible to invest in the SGBs?

Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, charitable institutions, etc.

What is the price of the bond at issue and at maturity?

Bonds will be redeemed in cash (converted into money) at the maturity period which is a maximum of 8 years. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. Both issue price and price at maturity are tied with the prevailing price of gold.

Who issues SGB?

SGBs are issued by Reserve Bank on behalf of Government of India. Since this is a bond, it can be held in demat or paper form. Investors can apply for the bonds through scheduled commercial banks and designated post offices, NBFCs and National Saving Certificate (NSC) agents.  BSE and NSE are included as receiving offices, apart from the commercial banks, SHCIL, designated post offices.

Interest rate of the bond

An interest rate of 2.75% will be paid to the investor or bond holder based upon the value of his investment at the beginning.

Tradability

Bonds would be allowed to be traded on exchanges to allow early exits for investors who may so desire.

Tax treatment

The interest on the Gold Bond shall be taxable as per the provisions of the Income Tax Act. Capital gain tax arising on redemption of SGB to an individual has been exempted. TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.

How the gold bond works?

As an investment asset, the significance of Sovereign Gold Bond is that they are substitutes for holding physical gold. This means that if you need not buy real gold to get higher price in future after keeping for a long time. Rather if you buy one-gram Sovereign Gold Bond, at the prevailing gold price today, you can get the price of one-gram gold prevailing on the future date at maturity. The money from the gold bond maturity depends upon the price of gold at the maturity date. This makes sovereign gold bond exactly like physical gold.

So far three tranches of the gold bond scheme were completed and the government has launched a fourth tranche with several changes. These changes are expected to attract more investors into sovereign gold bonds.

Changes made during the fourth tranche

Several changes were made to the fourth tranche that will be done during 2016-17 –following are the main changes. The minimum subscription has been reduced from 2 grams to 1 gram with the view to enlarge the subscriber base.

Price for gold has been fixed at Rs 3,119 per gram. Maximum subscription ceiling has been retained at 500 gm per person.

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