The new series of the Sovereign Gold Bond (SGB) Scheme opened for subscription on Monday. This is the third tranche in FY20 and the subscription closes on August 9. “The issue price of the Bond during this subscription period shall be Rs 3,499 per gramme with settlement date August 14, 2019,” the finance ministry said in a statement.
The nominal value of the bond is based on the simple average closing price for gold of 999 purity as published by the India Bullion and Jewellers Association Ltd (IBJA) over the last three business days of the week preceding the subscription period (July 31 to August 2, 2019). The series coincides with a spike in the yellow metal’s prices. Gold prices surged Rs 800 to hit an all-time high of Rs 36,970 per 10 gram at the bullion market on Monday.
The weak global economic outlook amid escalating US-China trade war tensions, a feeble US dollar and downbeat Asian equities lifted the metal’s safe haven appeal for investors and, in turn, pushed up prices. Analysts believe gold as an asset class should constitute anywhere between 5-15 per cent of the total investment portfolio, depending on the macroeconomic outlook.
The SGB scheme was launched in November 2015 with an objective to reduce the demand for physical gold and shift a part of the domestic savings into financial assets. “The market in physical gold being extremely liquid, many people prefer using it. But investing in gold through financial instruments such as gold ETFs and gold bonds is more efficient and convenient for investors,” said Vishal Jain, Head ETF, Reliance Nippon Life AMC.
Here are 10 things to know about the SGB scheme:
- The government, in consultation with the Reserve Bank of India, has decided to offer a discount of Rs 50 per gram less than the nominal value to investors applying online. For such investors, the issue price of Sovereign Gold Bonds 2019-20 (Series III) will be Rs 3,449 per gram of gold.
- These bonds will be sold through Scheduled Commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited (SHCIL), SEBI authorised trading members, designated post offices, and the stock exchanges.
- The gold bonds are issued in denominations of one gram and in multiples thereof.
- The maximum limit of subscription of 4 kg for individuals and Hindu Undivided Family (HUF) per fiscal year, while that for trusts and similar entities is 20 kg.
- Investors in gold bonds not only earn the appreciated value of gold but also 2.5 per cent interest rate per annum. Interest is paid semi-annually. The last interest payout is credited on maturity along with principal.
- There is a lock-in period of five years on gold bonds – post which premature redemption is permitted – while the maturity period is eight years. Sovereign gold bonds are also traded on stock exchanges (if held in demat form), offering an early exit option to investors.
- On maturity, the redemption price will be based on simple average of closing price of gold of 999 purity of previous three business days from the date of repayment as published by India Bullion & Jewellers Association (IBJA).
- Interest earned on SGB is taxable as per the subscriber’s tax bracket. But the capital gains tax arising on redemption of SGB to an individual on maturity has been exempted. Indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.
- These securities can 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.
- The SGB scheme offers a superior alternative to holding gold in physical form. Not only are the risks and costs of storage eliminated, investors also don’t have to deal with issues such as making charges and questionable purity. Moreover, the bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip.