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Buy Sovereign Gold Bonds This Diwali (Series III Public Issue Opens Today)

The MANY benefits of buying paper or electronic gold over physical gold (especially jewellery), have often been discussed on this blog.

So, this Diwali make a change in your mode of purchasing gold — Forget jewellery. Switch to Sovereign Gold Bonds

To make it easy for you, the Reserve Bank of India has announced the third Public Issue of the Sovereign Gold Bonds for the Financial Year 2017-18... with multiple tranches.

The salient features of the same are detailed below:

Product Name: Sovereign Gold Bond 2017-18 – Series III.

Eligible Investors: Only for the resident Indian entities (individuals, HUFs, trusts, universities, charitable institutions, etc.)

Application acceptance dates: Sovereign Gold Bond Scheme will be open for subscription from Monday to Wednesday of every week, starting from Oct 9th and until Dec 27th, 2017. Applications received during the week, will be settled on the first business day of the next week.

The first tranche is open from Oct 9 to 11, 2017 (Settlement on Oct 16, 2017)

Pricing Formula: Nominal Value based on the simple average closing price of gold — of 999 purity — during the last three business days of the previous week as per India Bullion and Jewellers Association Ltd. (IBJA).

Price (during Oct 9 to 11): Rs.2956 per gram of gold 

Note: For investors applying online and paying through the digital mode, the net price applicable will be Rs.2906 after considering a Discount of Rs.50.

Interest rate: @2.50% p.a. (payable semi-annually) on the initial value of your investment

[IMPORTANT: Starting with the Series III Bond for 2016-17, the Govt. has LOWERED the interest rate by 0.25% to 2.50% p.a. Prior to that, the Sovereign Gold Bonds were issued @2.75% p.a. interest rate.]

Investment limit (per financial year): Minimum 1 gram. The Maximum limit has been increased from 500 grams per person to 4 kgs (for individuals and HUFs) and 20 kgs (for trusts etc.). This is based on self-declaration and includes bonds purchased under different series, tranches and also the Secondary Market.

Tenor: These bonds mature after eight years from the date of issue (with an early exit option from the 5th year onward, on the interest payment dates only).

Where to buy: Scheduled Commercial Banks, Designated Post Offices, National Stock Exchange of India / Bombay Stock Exchange and Stock Holding Corporation of India (either directly or thru' agents)

Issuer: Reserve Bank of India on behalf of the Government of India

Denomination: In multiples of gram(s) of gold, with a basic unit of 1 gram

Mode of Payment: Demand Draft, Cheque or Electronic Banking (and also Cash, up to Rs.20,000 only)

Form: Govt. of India Stock Certificate. Can also be converted into demat form. 

Joint holding: Permitted (maximum investment limit of 4 kgs applies to the first applicant only)

Redemption pricing: Based on the simple average closing price of gold, of 999 purity, during the last three business days of the previous week, as per India Bullion and Jewellers Association Ltd. (IBJA)

(a) Interest income is taxable as per IT Act 
(b) Capital Gains on redemption (when the Bonds are held till maturity) is exempt from tax (only for individual investors)
(c) Capital Gains on transfer (when the Bonds are sold in the secondary market) is eligible for indexation benefit, if the holding period exceeds 3 years.

Collateral: Allowed as collateral for loans; with the same Loan-to-Value ratio as mandated by RBI on the physical gold.

KYC:  Voter ID, Aadhaar card / PAN or TAN / Passport i.e. same as for purchase of physical gold

Liquidity: Would be traded on the stock exchanges.

Commission: 1% of the subscription amount shall be paid to the receiving offices, who shall share at least 50% of the same with the agents procuring the business.

And, before I conclude, MY STATUTORY WARNING
a. The best option for "investing" in gold is undoubtedly the Sovereign Gold Bond.
b. As an alternative, you can also consider Gold ETF (Exchange Traded Fund).
c. However, gold jewellery as an investment is an absolute blunder.
d. On the parameters Price, Purity and Protection, Sovereign Gold Bonds and Gold ETFs are far (far) superior to jewellery.
e. Now pay 3% GST on physical gold (+5% GST on making charges); none on Gold Bonds
f. Due to Govt's nepotism, Sovereign Gold Bonds are a better choice as compared to Gold ETFs.
g. As many financial advisors (including me) have often warned, invest only a token amount in gold. Don't let your portfolio become too heavy on gold (and property).
h. Leave 'ample' room for financial assets (more particularly the mutual funds).

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