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The government is considering discontinuing the sovereign gold bond scheme due to the high cost of financing.
It was launched in 2015 as part of the Gold Monetisation Scheme to provide an alternative to physical gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
They are debt securities backed by gold. Each bond unit equals one gramme of gold.
The SGBs provide a fixed annual interest rate of 2.5%, which is credited to the investor's account semiannually. Investors pay the issue price in cash and receive the redemption amount in Indian rupees at maturity, which is based on the average closing price of 999 purity gold over the last three business days.
These bonds can also be traded on the secondary market, allowing investors greater flexibility. The bonds have an eight-year tenor but can be redeemed after five.
Individuals (either individually, on behalf of a minor child, or jointly with another individual), Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable Institutions can invest in SGBs.
The minimum investment is 1 gram of gold. The maximum subscription limits are as follows:
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SGBs are sold through nationalised bank offices or branches, scheduled private banks, scheduled foreign banks, designated post offices, the Stock Holding Corporation of India Ltd. (SHCIL), and authorised stock exchanges. Investors can purchase bonds directly or through agents. |
Bond payments can be made in cash (up to Rs. 20,000), demand draft, cheque or electronic banking.
Investors are assured of the market value of gold at maturity, as well as periodic interest payments.
These bonds can be used as collateral for loans from banks, financial institutions, and non-bank financial companies.
SGBs can be sold and transferred in accordance with the provisions of the Government Securities Act, 2006.
Individuals are exempt from capital gains tax when they redeem their SGBs.
The Series I SGBs (issued in 2016-17) matured in August 2024, and provided a return of more than 120% on the initial investment. The Series II bonds redeemed in March 2024 gave 126.4% of their initial investment. These returns indicate SGBs' potential as a profitable long-term investment vehicle.
The Union Government covers its fiscal deficit with a variety of instruments, including dated securities, the National Small Savings Fund (NSSF), provident funds, and sovereign gold bonds. The government believes that financing the fiscal deficit through SGBs is overly costly, with the cost of raising funds exceeding the scheme's benefits.
In July 2024, the government reduced gold customs duty from 15% to 6%. This move resulted in lower gold prices and increased demand, reducing the need for SGBs as an investment option.
For the fiscal year 2024-25, the government reduced gross SGB issuances from Rs 29,638 crore to Rs 18,500 crore. Net borrowing through SGBs has also been reduced to Rs 15,000 crore.
The government is reconsidering the continuation of the scheme due to the high cost of financing and the declining need for SGBs as a result of changes in gold duty and rising demand for gold. The government is concentrating more on cutting the budget deficit and reevaluating the overall advantages of issuing SGBs.
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PRACTICE QUESTION Q.Consider the following statements about the Sovereign Gold Bond scheme: 1. It was launched with the intention of decreasing investment in gold. 2. The Union government covers its fiscal deficit through sovereign gold bonds (SGBs). Which of the above statements is/are correct? A) 1 only B) 2 only C) Both 1 and 2 D) Neither 1 nor 2 Answer: B Explanation: Statement 1 is incorrect: The government is considering abandoning the sovereign gold bond scheme due to high funding costs. Officials believe that sovereign gold bonds were launched to increase investment in gold; however, the recent announcement to reduce import duties on gold in Budget 2024-25 already achieves that goal and has contributed to increased demand for gold. Statement 2 is correct: The Indian government uses a variety of instruments to finance its fiscal deficit, including dated securities, the National Small Savings Fund (NSSF), provident funds, and sovereign gold bonds (SGBs). |
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