Navigating the maze that is personal finance

Tuesday, 18 July 2017

Sovereign gold bonds: What you need to know

As Indians we are perpetually attracted to gold. Traditionally it is bought either in the form of jewellery or in form of gold coins and is considered safe haven for money to be utilized in times of need. To quench this thirst, Indian government has come up with sovereign gold bonds which allows not only holding gold in a safer form but also unlike the traditional form of holding gold, pays you an interest in the gold bought under the scheme. This year 2 tranches are already out, one in  April 2017 and other in July 2017. Let us see what exactly are these bonds.

What are gold bonds?
These are bonds issued by government whose value is related to market price of gold. Since they are sovereign backed, they are guaranteed. Gold here is held in demat or paper form. Value and maturity of these bonds are also linked to gold prices. At the time of issue the value of gold is based on previous week’s average of gold price and then given at discount.

What are the advantages of gold bonds?
Being backed by government the invested amount and interest is guaranteed by government. The value of the bond may go up or down depending on price of gold however.
  • Since they are in paper or demat form, they are much safer to hold than physical gold. 
  • These bonds can be used as collateral for loans.
  • One doesn't have to worry about the purity of gold.
  • There is a nomination facility available.

Who can buy these bonds?
Any of the following can buy:
  • Any resident Indian in individual capacity.
  • Any adult on behalf of minor child.
  • Any person jointly with other person.
  • Also trusts, institutions, University etc. can buy.

How much can be bought?
A min of 2 gm, then in multiples of 1 up to a maximum of 4 kg per fiscal year per person and 20 kg for trusts and similar entities notified by the government from time to time can be bought under the scheme.

What are the documents required?
ID documents ( pan,Aadhaar, voter ID, passport) for completion of KYC norms are required along with duly filled application.
For minors bank account number may be considered valid for KYC verification.

Where to buy?
It can be bought online, on NSE, in post offices, banks or any other such designated/ authorized place by RBI. On allotment holding certificates will be emailed to holders and bonds will be credited to their demat accounts. The receiving offices (where bonds are bought) are supposed to cater to all customer needs of premature withdrawal or updation of records or anything till the bond matures.

What is the interest paid?
2.5 % interest per annum is paid half yearly on bond value (initial buy value). It may change as announced by government.

What is the lock in period and withdrawal conditions?
These bonds have maturity at 8 yrs, the last interest with maturity value will be credited to registered account number. If traded before maturity but after 3 yrs then capital gains (indexation) tax is applicable on these bonds. Premature redemption is allowed after 5 yrs. They are tradable on stock exchange (only those that are held in demat form are eligible for trading, after notification for trading is received from RBI).


What is the maturity value?
The bond matures after 8yrs with interest and is paid at market value of gold at that time.
There is no TDS on interest paid to subscriber. There is no capital gain tax on maturity.
If bonds are traded before maturity then tax after indexation will be applicable to them.

ETF vs bonds?
Each of these options have there pros and cons. Before deciding on the option that best suits your need make sure to assess your future needs and liquidity potential of these instruments in mind.
ETFs have better liquidity as they can be liquidated easily, there is no lock in and no cap on the amount that can be invested as against bonds. As against bonds you have to pay a nominal amount to keep ETF in your portfolio which brings down the value of investment. ETFs cannot be used as collaterals while gold bonds can be. You earn an interest on the value you invested in bonds as against ETFs which are linked to market gold prices.

Jewellery vs bonds?
If gold is bought only for the purpose of investment then this should be your least favored option (if you are a female investor I will not dare to talk you away from this option; if you are a male don’t forget to discuss this with your better half before cutting off this option).
  • Making charges can be as high
  • No guarantee of purity
  • Resale value less than the price at which it is bought
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