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Sovereign gold bonds OR Gold coins / bars

In his Union Budget for 2015-16, Finance Minister Shri Arun Jaitley had proposed three schemes to save India from the gold-obsessed Indians viz. Gold Monetisation Scheme, Sovereign Gold Bond and Indian Gold Coin.

A few weeks back Govt. had announced the Draft Guidelines on the Gold Monetisation Scheme.

And now come the Draft Guidelines on the Sovereign Gold Bond.

The Govt. has placed this draft for public opinion and has invited comments on the same till July 2, 2015.

The objective of the scheme, as stated in the budget document, was to "Also develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond."

As per the draft guidelines...

... Through this scheme, the Govt. intends to shift a part of the demand for gold coins / bars into demat gold bonds.

... Sovereign Gold Bonds would be issued on payment of money and would be linked to the price of gold.

... RBI would issue these bonds on behalf of the Govt. of India. The bonds would have sovereign guarantee.

... Only resident Indian entities can buy these gold bonds.

... There would be a cap on total purchase allowed, at 500 gms per person per year.

... Govt. proposes to issue gold bonds equivalent to 50 tonnes in FY 2015-16 (= Rs.13,500 crores at current prices).

... This would result in cutting down India's import bill by around $2 billion.

... These bonds will be marketed through the post offices and brokers / agents on commission basis.

... They will attract the same capital gains tax as physical gold, so as to maintain parity between the two.

... Gold bonds would be issued in 2 gm, 5 gm, 10 gm and other denominations.

... Minimum tenor is proposed at 5-7 years so as to protect the investors from volatility.

... On maturity, the face value of gold would be redeemed in terms of rupees.

... On issue and redemption, the price of gold would be taken from NCDEX / London Bullion Market Association / RBI and the Rupee amount calculated as per RBI Reference rate.

... The bonds would be traded on the commodity exchanges.

... KYC norms would be the same as for physical gold.

... Gold bonds would be an eligible collateral for availing loans. Loan to Value would be the same as for ordinary gold as fixed by RBI from time to time.

... As an incentive, interest linked to the international rate for borrowing gold would be paid; with an indicative lower limit of 2%.

Given that you don't earn any interest on physical gold, interest on sovereign gold bonds becomes your additional income, over and above the appreciation in price of gold that you expect to earn.

Besides, gold bonds are a lot simpler and safer to store than the physical gold.

Thus, apart from benefiting the Indian economy by way of reduced pressure on the Current Account Deficit, Sovereign Gold Bonds are better than buying physical gold.

However, as most experts repeatedly caution, don't invest more than 10% of your portfolio in gold. It is a non-productive asset, with long term returns barely in the range of 6-8% p.a.

Note: The taxation of physical gold is as under 
a) Short Term Capital Gains (up to 3 years holding period) is included in the person's total income and taxed as per his/her marginal tax slab rate
b) Long Term Capital Gains (more than 3 years holding) is taxed at 20% with indexation.

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