Sovereign Gold Bonds Scheme

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Sovereign Gold Bonds Scheme

The Indian government has announced that they will be launching the Sovereign Gold Bonds Scheme soon. As investors will get returns that are linked to gold price, the scheme is expected to offer same benefits as physical gold. They can be used as collateral for loans and can be sold or traded on stock exchanges.

How will the scheme work?
The gold bonds will be issued by the Reserve Bank of India (RBI). Since these are Government of India bonds, they have sovereign guarantee. The bonds will be denominated in grams of gold. Sovereign Gold Bonds Scheme The issuance of the Sovereign Gold Bonds will be within the government's market borrowing programme for 2015-16 and onwards. The actual amount of issuance will be determined by RBI, in consultation with the Ministry of Finance. The risk of gold price changes will be borne by the Gold Reserve Fund that is being created. The benefit to the Government is in terms of reduction in the cost of borrowing, which will be transferred to the Gold Reserve Fund.

Cost: The initial cost in owning physical gold can be as high as 25 per cent. In case of Sovereign Gold Bonds, there will not be any entry charge and even the fund management cost will not be there. The issuing agency which would pay distribution costs and a sales commission to the intermediate channels would be reimbursed by Government.

Rate of Interest: For Sovereign Gold Bonds, the Government will issue bonds with a rate of interest to be decided by the Government. The rate of interest will take into account the domestic and international market conditions and may vary from one tranche to another. This rate of interest will be calculated on the value of the gold at the time of investment. The rate could be a floating or a fixed rate, as decided. The price of gold may be taken from the reference rate, as decided, and the Rupee equivalent amount may be converted at the RBI Reference rate on issue and redemption. This rate will be used for issuance, redemption and LTV purpose and disbursement of loans.

Limits: Sovereign Gold Bonds will be issued in denominations of 5, 10, 50,100 grams of gold or other denominations, and the cap remains at 500 grams per person a year. Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of gold. The bonds can be bought by Indian residents or entities and is capped at 500 grams.

How to invest?
Issuing agencies would be the designated banks, NBFCs, Post Offices, National Saving Certificate (NSC) agents and others, as specified by government. They would be authorised to collect investments and even redeem bonds on behalf of the government.

Is it for me?
  • The Sovereign Gold Bonds will be available both in demat and paper form.
  • The tenor of the bond could be for a minimum of 5 to 7 years where units can be liquidated anytime.
  • They will carry sovereign guarantee both on the capital invested and the interest declared and accrued to the bonds.
  • Bonds can however be used as collateral for loans.
  • Further, bonds would be allowed to be traded on exchanges to allow early exits for investors who may so desire.
  • In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold for an 'individual' investor". The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption.
How do I redeem it?
On maturity, the redemption will be in rupee amount only. The rate of interest on the bonds will be calculated on the value of the gold at the time of investment. The principal amount of investment, which is denominated in grams of gold, will be redeemed at the price of gold at that time. If the price of gold has fallen from the time that the investment was made, or for any other reason, the depositor will be given an option to roll over the bond for three or more years. Remember, any upside gains and downside risks will be with the investor and the investors will need to be aware of the volatility in gold prices.