Things You
Things You Need To Know About the Sovereign Gold Bond Scheme
We Indians have a penchant to own gold, be it in any form. Besides financial reasons, gold is often viewed emotionally here in India. The precious yellow metal is often bought for occasions such as weddings, festivals and even passed on to generations. India is the world's largest consumer of gold with about 1,000 tonnes of gold being imported every year.
But this proclivity, has led to Current Account Deficit (CAD) problems for the country in the past, which is why the Government increased the import duty on gold. Since the import duty is locked in at 10% there have been rise in instances of smuggling. Smugglers reckon India's insatiable appetite for gold.
In order to tackle this, in the Union Budget 2015-16, the Government proposed to develop a Sovereign Gold Bond Scheme (SGBS) as an alternative to purchase gold. This Scheme was recently approved by the Government, and now the Reserve Bank of India (RBI) will issue gold bonds on behalf of the Government.
Sovereign Gold Bonds will generate returns linked to the price of gold. Moreover, these bonds will provide interest income to investors and will be redeemable.
Here are some of the features of the Sovereign Gold Bond Scheme…
- Purchase of bonds:
One will be able to purchase these bonds via banks, Non-Banking Finance Companies (NBFCs), post offices and agents. They would be available in denominations of 5, 10, 50 and 100 grams, but for investment over a sum of Rs 50,000 furnishing a copy of PAN card is mandatory. These bonds can be held in paper or demat form.
- Maximum quantity:
An individual will be able to buy a maximum of 500 grams in a period of 1 year, under this scheme.
- Tenure of bonds:
Gold bonds would have tenure of minimum 5 to 7 years, which would take care of short term and medium term volatility. Nevertheless, you will also be able to redeem them before the end of this period by selling them on the exchange.
- Collateral for loans:
These bonds would also act as collateral in case you wish to take a loan in the future in the loan-to-value ratio allowed by the RBI.
- Tax on capital gains:
Tax benefits might be declared on the capital gains earned on the redemption of these bonds in the Union Budget 2016-17.
- Rate of interest:
The rate of interest on gold bonds is yet to be finalised by the Government. But it is most likely that the rate would be based on domestic and international market conditions. Thus, it may even vary from one tranche to another.
While the means of taking exposure to gold depends upon your suitability, sovereign gold bonds definitely have an advantage over other ways of investing in gold such as physical gold, gold ETFs (Exchange Traded Funds) and gold savings funds. This is because gold bonds, apart from capital appreciation, also enable an investor to earn interest on his investments. This is not the case in other instruments. Moreover, if a tax benefit is announced on the capital gains earned on redemption of gold bonds in the next Union Budget, it could bring along tax efficiency to the investment instrument. At present gold ETFs, gold saving funds or investing in physical gold is not as tax efficient. Another benefit that gold bonds provide is that the burden of sales and distribution costs will not be on the investors. Thus, we believes that with the introduction of this scheme, there could be a noticeable change in the way people hold the precious yellow metal.
Your investment strategy…
Considering the advantages that sovereign gold bonds might have to offer, it is a worthwhile proposition while taking exposure to gold. However, you must keep in mind that although this might be a beneficial route to invest in gold, there would be no point having an over exposure. We believes that considering your investment time horizon, you must allocate not more than 10% to 15% of your total portfolio towards gold. Avoid a speculative approach while investing in gold. Look at it as a portfolio diversifier and a monetary asset (rather than a mere commodity), which can help you reduce risk to your overall portfolio with its trait of being a store of value in times of uncertainties. Ideally invest in gold with a longer investment horizon.
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