‘Gold’en opportunity: Sovereign Gold Bonds

In news:

The next tranche of Sovereign Gold Bonds opens for application on July 10. This is the second issue of Sovereign Gold Bonds so far this fiscal year, and ninth overall. Sovereign Gold Bonds offer retail investors an opportunity to invest in the precious metal and get a fixed return on their investments in addition to any appreciation or depreciation in the price of the underlying asset — gold itself.

The recent implementation of 3% GST rate on gold would also act as an advantage to the buyers of Sovereign Gold Bonds, which would not beat the tax.

 About Sovereign Gold Bonds:

Sovereign Gold Bond is a fixed-term bond issued by the Reserve Bank of India, which represents the exact weight of gold purchased by the investor for a period till the maturity of the security. Owning a gold bond is akin to owning actual gold, though not in the physical metal form, but rather in paper or demat form. The government introduced the Sovereign Gold Bonds scheme in 2015 in order to provide an alternative option to people to own gold without worrying about its storage or safety. It also seeks to reduce demand for physical gold and thereby keep a check on imports.

Benefits:

GST-free: The government has implemented a 3% GST on gold, gems and jewellery in the recent overhaul of India’s tax regime. Though this tax rate is lower than the lowest slab of 5% under GST for other taxable items, the GST on gold is still higher than 1% VAT which was levied earlier on gold bullion and jewellery. This would push up the cost of buying physical gold, but Sovereign Gold Bonds are immune from the levy of GST.

Additional return: Investors earn a fixed rate of return in addition to the underlying gold rate owned by them. The upcoming ninth tranche of Sovereign Gold Bonds will earn an interest rate of 2.5% per year, payable semi-annually.

Tax gains: The interest earned adds to investors’ taxable income, but redeeming the bonds at maturity is exempt from long term capital gains tax, unlike in the case of physical gold, which attracts capital gains tax on sale at any point. Sale or transfer of Sovereign Gold Bonds before the maturity will attract capital gains tax as per the period of the security held.

No making charges: Investors do not have to bear any making charges on buying the gold in form of Sovereign Gold Bonds, unlike what they have to pay when purchasing bullion, jewellery, gold coins, gold biscuits, etc.

Purity: Sovereign Gold Bonds are benchmarked against 999 purity gold. In Sovereign Gold Bonds, investors have the certainty of owning the gold of the quality promised to them at the time of the purchase, unlike the scope of adulteration in the metal bought from local jewellers or bullion traders.

Loan collateral: Sovereign Gold Bonds can be used as collateral for loans. The loan- to-value ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.

Gold price: The price of these bonds closely tracks the rate of gold, and may be an advantage or disadvantage at the time of sale or redemption. Whatever the price of gold at any point of time, the amount of gold held will not change, only the price will.

What does the government get out of it?

The government seeks to raise Rs 5,000 crore this financial year through its three gold schemes. The other two schemes are 1) Gold Monetisation Scheme, under which people can deposit their gold with banks and earn interest on it — it is a replacement ofGold Deposit Scheme 1999, and 2) Indian Gold Coin, which is India’s first ever gold coin and bullion to be issued by the Government of India. The government has so far raised Rs 5,400 crore from the previous eight tranches of the Sovereign Gold Bonds. Other than raising funds, the government also seeks to reduce import of physical gold and prevent the outflow of currency.

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