Sovereign Gold Bonds
GS PAPER II: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context: The Reserve Bank of India (RBI) has announced a plan to sell sovereign gold bonds (SGBs) — government securities denominated in grams of gold — in six phases.
What is Sovereign Gold Bond (SGB)? Who is the issuer?
- SGBs are government securities denominated in grams of gold.
- They are substitutes for holding physical gold.
- Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity.
- The Bond is issued by Reserve Bank on behalf of Government of India.
Who is eligible to invest in the SGBs?
- Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB.
- Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.
- Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.
- Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s).
What are the terms of the issue?
- Gold bonds bear interest at a fixed rate of 2.50% per annum on the amount of initial investment which will be credited semi-annually.
- Bonds are sold through offices or branches of nationalised banks, private banks, foreign banks, designated post offices, Stock Holding Corporation of India Ltd. and the authorised stock exchanges either directly or through their agents.
What will investors get on redemption?
- Investors gain from appreciation in gold prices as redemption of bonds will be based on the then prevailing prices.
- If gold prices treble after eight years, the investor will get the higher prices plus the 2.5% interest.
- The investor does not lose in terms of the units of gold which he has paid for.
- On maturity, the gold bonds will be redeemed in Indian rupees and the redemption price will be based on a simple average of closing price of gold of 999 purity of the previous 3 business days from the date of repayment.
- Although the tenure of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year, on coupon payment dates.
- The bond will be tradable on exchanges, if held in demat form. It can also be transferred to any other eligible investor.
Why should an investor buy gold bonds rather than physical gold?
- The quantity of gold the investor pays for is protected, since he receives the ongoing market price at the time of redemption/premature redemption.
- The bonds offer a superior alternative to physical gold. The risks and costs of storage are eliminated.
- Investors are assured of the market value at the time of maturity, and periodical interest.
- Bonds are free from issues like jewellery making charges and purity. The bonds are held in RBI books or in demat form, eliminating the risk of loss of scrip etc.
What are the minimum and maximum limits for investment?
- The bonds are issued in denominations of 1 gram of gold and in multiples thereof.
- The minimum investment will be 1 gram, with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year.
Can these securities be used as collateral for loans?
- They can be used as collateral for loans from banks, financial Institutions and non-banking financial companies (NBFC).
- The loan-to-value ratio will be the same as applicable to ordinary gold loans prescribed by RBI from time to time.
What are the tax implications?
- Interest on the bonds will be taxable as per the provisions of the Income-Tax Act, 1961
- The capital gains tax arising on redemption of SGB to an individual has been exempted.
- TDS is not applicable on the bonds.
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