Should you invest in the latest Sovereign Gold Bond?

Last Updated: Sat, Jul 15, 2017 17:00 hrs

The latest issue of Sovereign Gold bond (SGB) closes on July 14. For those seeking to invest in paper gold, the question is not whether to buy or not to. But, instead how much to invest.

The RBI issued SGBs on July 10, Monday and issued bonds for a tenure of eight years, at a rate of Rs 2780 per gram.

What is Sovereign Gold Bond?

The objective of the Sovereign Gold Bond, first launched in November 2015, was to reduce demand for physical gold and shift a major part of domestic saving to financial holdings.

India's demand of gold is a major drain on crucial foreign exchange outflow. Nearly 1000 tonnes of gold gets imported every year, which results in a largescale foreign exchange outflow.

Users can purchase a minimum of 1 gram, which can go upto 500 grams per financial year.

How is price calculated?

The value of the bond is based on a simple average closing price during the week preceding subscription period published by the IBJA (India Bullion Jewellers Association).

The RBI in consultation with the government of India has agreed to offer aRs 50 discount, and the final issue price has been adjusted as Rs 50 per gram less than the nominal value (published by IBJA). The Gold rate calculation will again factor IBJA prices during redemption to ensure that investors get the right market value on their investments.

Besides price appreciation, investors can expect a 2.5% interest payout per annum on the initial investment to be paid half yearly.

The gold can not only be redeemed but it also makes way for premature withdrawals after 5 years. Withdrawals can be made on the two days when the interest is paid out. The gold bonds will be traded on the bourses too.

Gold bond vs physical gold

So, what are the advantages the bonds offer?

With GST kicking in, buying gold has become costlier. There is a 3% charge on gold purchase, while jewelry will entail making charges in the range of 6-10%. Physical gold investments will also factor the additional cost of capital gains tax that could erode the value on investments.

Gold Bond, a paper investment, overcomes these challenges, and is a safer bet.

Unlike Physical Gold, there is no GST nor making charges on bonds. In fact, there is no tax, storage costs, nor is there a cost on redemption in case one wants to exchange them for physical gold. The bond also offers a 2.5% incentive on a half-yearly basis on top of investments.

Fortunately, capital gains made through investments on Sovereign Gold bond and redemption has been exempted from the provisions of Income tax. Users are also provided indexation benefits on long term capital gains arising during a transfer.

Where to buy?

Gold bonds issued by the RBI will be sold through banks, post offices, Stock Holding Corporation of India (SHCIL), and recognised Stock Exchanges such as the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Demand draft, Cheque as well as electronic clearing are the accepted modes of payments.

The bonds are being issued in denominations of one gram gold and thereof. A self-declaration as well as KYC norms will be applied on the purchase. KYC documents required during the transaction are similar to those that one would need during gold purchase, such as Voter ID, Aadhaar card, PAN or TAN, or Passport.

Gold rate in india

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