On Tuesday, Sept 15, 2015, the Finance Ministry announced the guidelines for the Sovereign Gold Bonds Scheme.
The aim is to bring down the demand for "physical" gold, by shifting a part of your yearly investment in gold bars and coins, to "financial" gold bonds.
Salient features of the Sovereign Gold Bonds Scheme are summarized below.
Eligible Investors
Only "resident Indian" entities are permitted to invest in these bonds.
Limit on Investment
Investment in gold bonds has been capped at "500 grams per person per year".
Nature of bonds
These gold bonds would be available in various denominations of gold, such as 2, 5, 10, 50 and 100 grams (or any other); and issued both in paper and demat form.
Price of bonds
Though denominated in grams of gold, (a) the price at which you can buy and (b) the money that you receive on redemption, would both be in rupees.
The purchase and redemption amounts would be calculated using the RBI Reference Rate as prevailing on that date.
Rate of interest
Based on its borrowing programme, the Govt. proposes to issue these bonds in tranches.
Accordingly, rate of interest will be fixed based on the market conditions prevailing from time to time. Hence, the rate may differ from one tranche to another.
Rate of interest for the first tranche will soon be announced and could be either fixed or floating in nature.
Interest payable (on redemption) will be calculated, based on the value of gold at the time of investment in rupee terms.
Tenure
A minimum tenure of 5 to 7 years has been fixed, so that investors are protected against the volatility in gold prices.
In addition, you also have the option to rollover the bonds for further three or more years. This is an additional safeguard, in case the gold price is down when the bonds are due for redemption. You can, however, rollover your bonds for any other reason too.
Further, to provide liquidity, these bonds would be listed and traded on the exchanges.
Risk
Gold bonds are backed by sovereign guarantee. So there is no risk of default.
However, risk of movement in gold prices would be borne by the investors. Both, the upside gains and downside risks, are entirely to your account.
Tax
The bonds attract the same capital gains taxation as physical gold.
Loan
You can pledge these bonds as a collateral for borrowings. The same Loan to Value ratio, as for physical gold, would apply here too.
KYC
The same KYC norms would be followed as applicable for physical gold.
Where to buy
Gold bonds would be issued by the Reserve Bank of India through Banks, Post Offices, NBFCs, NSC agents and other specified entities. They will act as intermediaries and collect money / redeem the bonds. The Govt. of India would pay sales commission and distribution costs to such intermediaries.
CONCLUSION
Your gold bars and coins earn you "zero interest". On the other hand, gold bonds will give you interest income. Plus, of course, the appreciation in price of gold is all yours, just like physical gold. So why miss on the "golden" opportunity to earn extra income... and that too, totally risk free.
Moreover, having gold bonds are far more safe and secure than storing physical gold.
And, finally, as a patriotic Indian, you must help the economy by reducing the import of gold.
CAUTION : However, most experts (including me) repeatedly warn against putting too much money in gold. It is a non-productive asset, with long term returns barely in the range of 6 to 8% per annum.
The aim is to bring down the demand for "physical" gold, by shifting a part of your yearly investment in gold bars and coins, to "financial" gold bonds.
Salient features of the Sovereign Gold Bonds Scheme are summarized below.
Eligible Investors
Only "resident Indian" entities are permitted to invest in these bonds.
Limit on Investment
Investment in gold bonds has been capped at "500 grams per person per year".
Nature of bonds
These gold bonds would be available in various denominations of gold, such as 2, 5, 10, 50 and 100 grams (or any other); and issued both in paper and demat form.
Price of bonds
Though denominated in grams of gold, (a) the price at which you can buy and (b) the money that you receive on redemption, would both be in rupees.
The purchase and redemption amounts would be calculated using the RBI Reference Rate as prevailing on that date.
 |
| New way to invest in gold emerges... Gold Bonds. Say NO to bars and coins. |
Rate of interest
Based on its borrowing programme, the Govt. proposes to issue these bonds in tranches.
Accordingly, rate of interest will be fixed based on the market conditions prevailing from time to time. Hence, the rate may differ from one tranche to another.
Rate of interest for the first tranche will soon be announced and could be either fixed or floating in nature.
Interest payable (on redemption) will be calculated, based on the value of gold at the time of investment in rupee terms.
Tenure
A minimum tenure of 5 to 7 years has been fixed, so that investors are protected against the volatility in gold prices.
In addition, you also have the option to rollover the bonds for further three or more years. This is an additional safeguard, in case the gold price is down when the bonds are due for redemption. You can, however, rollover your bonds for any other reason too.
Further, to provide liquidity, these bonds would be listed and traded on the exchanges.
Risk
Gold bonds are backed by sovereign guarantee. So there is no risk of default.
However, risk of movement in gold prices would be borne by the investors. Both, the upside gains and downside risks, are entirely to your account.
Tax
The bonds attract the same capital gains taxation as physical gold.
Loan
You can pledge these bonds as a collateral for borrowings. The same Loan to Value ratio, as for physical gold, would apply here too.
KYC
The same KYC norms would be followed as applicable for physical gold.
Where to buy
Gold bonds would be issued by the Reserve Bank of India through Banks, Post Offices, NBFCs, NSC agents and other specified entities. They will act as intermediaries and collect money / redeem the bonds. The Govt. of India would pay sales commission and distribution costs to such intermediaries.
CONCLUSION
Your gold bars and coins earn you "zero interest". On the other hand, gold bonds will give you interest income. Plus, of course, the appreciation in price of gold is all yours, just like physical gold. So why miss on the "golden" opportunity to earn extra income... and that too, totally risk free.
Moreover, having gold bonds are far more safe and secure than storing physical gold.
And, finally, as a patriotic Indian, you must help the economy by reducing the import of gold.
CAUTION : However, most experts (including me) repeatedly warn against putting too much money in gold. It is a non-productive asset, with long term returns barely in the range of 6 to 8% per annum.
