All you need to know about Sovereign Gold Bonds Scheme – a substitute for investment in physical gold

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What is Sovereign Gold Bonds? Is investing in Sovereign Gold Bonds better than investing gold? Is it a good investment options for Middle class Citizens?, and many other questions arise whenever any body talks about investing in new assets or specifically the Sovereign Gold Bonds. So here is this article answering  these questions.

What is Sovereign Gold Bonds (hereinafter SGBs)?

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 are eligible for Investment in Sovereign Gold Bonds?

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.

Even the minors can make application for investment in Sovereign Gold Bonds i.e. SGBs but the application on behalf of the minor has to be made by his/her guardian.

Minimum Investment, Denomination and Pricing:-

The SGBs are issued in the denominations of one gram gold or multiples thereof and the minimum limit of subscription for bonds shall be one gram and maximum limit of subscription per fiscal year shall be of 4 kgs for Individuals and HUFs and 20Kgs for trusts and similar entities notified by the Government time to time

The nominal value of Gold Bomds shall be in Indian rupees fixed on the basis of simple average of closing price of gold of 999 purity, published by the Indian Bullion and Jewellers Assosciation Limited for the last three working days of the week preeceding the subscription period.

Note:- The issue price of the gold Bonds will be 50 per gram less than the nominal value for those investors applying online and payment against the application is made through digital mode.

Process of application

The application form will be provided by the issuing banks/SHCIL offices/designated Post Offices/agents. It can also be downloaded from the RBI’s website. Banks may also provide online application facility.

Any person desirous of subscribing to the Gold Bonds shall apply to any receiving office in Form ‘A’ or in any other form as near as thereto, stating clearly the grams of gold, full name and address of the applicants.

Every application shall be accompanied by the PAN number of the applicant issued by the ITD.

When to Invest in Sovereign Gold Bonds?

The Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds. The Sovereign Gold Bonds will be issued in six tranches from May 2021 to September 2021 as per the calendar specified below:

Sr. No. Tranche Date of Subscription Date of Issuance
1. 2021-22 Series I May 17–21, 2021 May 25, 2021
2. 2021-22 Series II May 24–28, 2021 June 01, 2021
3. 2021-22 Series III May 31-June 04, 2021 June 08, 2021
4. 2021-22 Series IV July 12-16, 2021 July 20, 2021
5. 2021-22 Series V August 09-13, 2021 August 17, 2021
6. 2021-22 Series VI August 30-September 03, 2021 September 07, 2021

Interest rate and how it will be paid?

The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

On redemption:-

On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited. Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond.

Procedures involved during redemption.

  • The investor will be advised one month before maturity regarding the ensuing maturity of the bond.
  • On the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record.
  • In case there are changes in any details, such as, account number, email ids, then the investor must intimate the bank/SHCIL/PO promptly.

Can the bonds be issued in demat form?

Yes. The bonds can be held in demat account. A specific request for the same must be made in the application form itself. Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to demat will also be available subsequent to allotment of the bond.

Can we trade these bonds?

The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges). The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006. Partial transfer of bonds is also possible.

Is premature redemption allowed?

Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after fifth year from the date of issue 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.

How to exit the investment?

In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

Can these securities be used as collateral for loans?

Yes, these securities are eligible to 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 loan prescribed by RBI from time to time. Granting loan against SGBs would be subject to decision of the bank/financing agency, and cannot be inferred as a matter of right.

What are the tax implications on i) interest and ii) capital gain?

Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

 Is tax deducted at source (TDS) applicable on the bond?

TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.

Why should SGB be considered rather than physical gold? What are the benefits?

The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

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