Gold has always been a major investment product in our country. All of our parents have been regularly and heavily investing in gold. Even in the present day time when so many financial products are available, financial planners still advise investment of a certain percentage in gold for diversification. Moreover, Indians are to date obsessed with gold, a major part of which is being imported into the country. In fact, due to these heavy imports of oil and gold, the Indian currency is constantly under pressure.
To meet the demands of investment in gold, and to ensure that the balance of payments position of the country is not adversely affected, the Indian government introduced the monetization of the gold scheme in the year 2015. As a part of this scheme, the government has been issuing Sovereign Gold Bonds from time to time through its central bank, which is the Reserve Bank of India. At the beginning of the month, RBI announced the issue of these bonds in monthly trances for this year, the first of which is open from April 20, 2020, to April 24, 2020.
Who can invest in Sovereign Gold Bonds?
Any resident under the Foreign Exchange Management Act (FEMA) can invest in these Sovereign Gold Bonds. Thus, any individual, HUF, Trust, and Universities can invest in an SGB. Guardians are also allowed to make investments on the behalf of a minor in this scheme.
KYC documents in the form of Voter ID, Aadhaar Card/PAN or TAN/Passport are a must to buy the Sovereign Gold Bond. Having a PAN card is mandatory to invest in these bonds. Also, though a Non-Resident Indian cannot invest in these bonds by purchasing a subscription, he or she is allowed to holds these bonds when received as a nominee of a resident investor.
These bonds can be purchased from banks, stock holding corporations, recognized stock exchanges, and post offices.
When applying for a Sovereign Gold Bond, the application must be made in the minimum lot of 1 gram, and in multiples of 1 gram thereof, up to the maximum permissible limit. In a single financial year, an individual or HUF can invest in up to 4 kilograms in the Sovereign Gold Bond. Other eligible entities, however, are allowed an investment of up to 20 kilograms in a single year.
When calculating the limits, the investment that has been made through initial subscription, as well as those that have been purchased, will both be taken into account. Additionally, these bonds can be held jointly, but for limits, they are always computed concerning the first holder. The investor is allowed to make a nomination in favor of any person in respect of these bonds.
Tenure of Sovereign Gold Bonds and their premature redemption
Sovereign Gold Bonds have a total tenure of 8 years. Investors, however, have the option to opt for early redemption, after having completed 5 years on the interest payment dates. Investors also have the option to choose between physical bonds or DEMAT forms while applying for the same. Additionally, investors can also convert their physical certificates into a DEMAT later on if they want to. Additionally, though the bond has a lock-in period of 5 years, investors have the option to get out of the bond by selling it on the stock exchange.
Issue and redemption price of Sovereign Gold Bonds
Sovereign Gold Bonds are issued at a nominal rate per gram which is computed based on the simple average price of the 0.999 purity gold (as per the publishing of the Bullion and Jewellers Association Limited) of the last three days of the week which precedes the week in which the bonds are to be issued.
For the present trance, the price per gram has been fixed at INR 4,639.
More issues will be made each month till September of this year, as per the calendar that has been issued by the RBI. Additionally, investors who apply online and pay through digital modes are entitled to a discount of INR 50 per gram. At the time of redemption, these bonds will be redeemed at the prevailing price of gold. The redemption price of these bonds is also computed in the same manner as that of the issue price.
Holders of these bonds are entitled to receive an annual interest of 2.50% on the issue price, which is payable half-yearly.
Profit on the redemption of Sovereign Gold Bonds
The interest which will be received on the Sovereign Gold Bonds is fully taxable in the hands of the investor. On the other hand, profits that are made on the redemption of these bonds are exempted from any capital gains tax. However, the exemption from these capital gains is available only on redemption, and not on sale on or before redemption. In case the bonds are sold before redemption, the investor is entitled to avail the indexation benefit for calculating any capital gains.
Should you invest in gold?
Gold not only offers protection against inflation but also offers liquidity at times of economic and political instability. It thus only makes sense to have a certain portion of one’s portfolio invested in gold. Especially in a country like ours where gold is an indispensable part of all social occasions, especially marriage; it is important to invest in gold. This ensures that at least some gold is readily available when needed. And investment in gold through bonds is sure to get you interest as well as appreciation. Moreover, profits on redemption are tax-free, and thus investment in bonds is encouraged. In cases of emergency, one can also get loans against these bonds by offering them as security. This makes these bonds more liquid than any other investment products out there.