The Key Features and Benefits Gold Bond Scheme introduced by Government of India with Reserve Bank of India. Should you Invest in it ?
"The desire for gold is the most universal and deeply rooted commercial instinct of the human race." - Gerald M. Loeb
Gold is a significant asset class available for investment from generations. Indians have always been obsessed with this yellow metal, especially women. If you are planning to buy Gold this Dhan Teras, you will have to buy it online as gold shops would be closed. Apart from buying physical gold from online jewellery stores, you may also invest in Gold through Sovereign Gold Bonds (SGBs) and Exchange Traded Funds (ETFs). This Blog is about features of both these options. You should choose between these two according to the feature you are comfortable with.
WHAT IS SOVEREIGN GOLD BONDS?
The government of India has introduced gold monetisation scheme in 2015 with a view to minimise gold imports. As a part of gold monetisation scheme, the Government of India has been issuing Sovereign Gold Bonds (SGBs) from time to time through the Reserve Bank of India. Investment can be made with minimum of 1 Gram and in multiple thereof.
Only Resident Individuals, HUFs, Trusts, whether a public or private, Charitable Institutions and Universities can buy Sovereign Gold Bonds (SGBs). Resident Individuals and HUFs can buy Maximum 4 KiloGram in a Financial Year, other entities can buy maximum 20 KiloGram in a Financial Year.
WHAT IS GOLD EXCHANGE TRADED FUNDS?
Exchange Traded Funds are issued by Mutual Fund Houses. These are called exchange-traded funds as they can be bought and sold on stock exchanges on a daily basis. Since the benchmark of Gold ETFs is physical gold price, you can buy it close to the actual price of gold. Almost every major fund house of India has introduced their Gold ETFs. To buy gold ETFs you need to have a trading Demat account. Everyone can buy Gold ETFs and there is no upper limit on maximum investment that can be made.
FROM WHERE TO BUY:
RBI opens new series of Bonds for subscription almost every month and dates can be viewed on their Website. Bonds can be bought through Commercial banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges i.e., National Stock Exchange of India Limited and Bombay Stock Exchange Limited, either directly or through agents. These bonds are always traded on Stock Exchanges, so one can buy from there also. ETFs can be bought from NSE or BSE.
INTEREST:
Interest @2.5% p.a. is paid on Sovereign Gold Bonds calculated on initial issue price throughout the 8 years on half yearly rests to the holders as on cut-off date, while there is no interest paid on ETFs. In this way, total return exceeds in SGBs as compared to ETFs.
Interest received on SGBs are not Tax Deductible, however recipients are liable to pay tax according to tax rates applicable to them.
TRADING AND REDEMPTION:
As the name suggests ETFs are always traded on Exchanges and one can redeem his investment without any Lock-in period. The Gold Bond can also be traded on stock exchanges after issuance, if held in Demat form. However, Government will redeem only from 5th to 8th years from the date of issuance.
TAXABILITY ON GOLD:
The taxability of Gold ETFs are same as the Physical Gold in India, i.e. if it is sold within 36 months from the date of making of investment, there will be Short Term Capital Gain (STCG) Tax and if it is sold after 36 months there will be Long Term Capital Gain (LTCG) Tax with indexation benefit.
If one holds Sovereign Gold Bonds (SGBs) till the date maturity i.e. for a total of 8 years from the date of issuance, there will be no requirement to pay LTCG Tax as it is exempted, however if one sells his bond before it is redeemed, he will have to pay STCG/LTCG Tax, as applicable.
LOAN AGAINST COLLATERAL:
Sovereign Gold Bonds (SGBs) are accepted as collateral for taking up loan just as physical gold is accepted for Gold Loan. Exchange Traded Funds are not accepted as collateral for Gold Loan.
Considering the benefits of Interest, Long Term Capital Gain Tax exemption on maturity and issuer being the Government itself, Long Term Investors of Gold should consider buying these Bonds.
Leave a comment