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Explained: Why it makes sense to invest in RBI’s sovereign gold bonds

Sovereign gold bonds (SGBs): The RBI has announced a plan to sell sovereign gold bonds (SGBs) in six phases until September 3. Why should an investor buy gold bonds rather than physical gold?

Written by George Mathew , Sandeep Singh | Mumbai, New Delhi |
Updated: May 27, 2021 11:08:42 am
The Sovereign Gold Bond Scheme 2021-22—Series I, issued by RBI, will be open for subscription for the period May 17-21, 2021.

The Reserve Bank of India (RBI) has announced a plan to sell sovereign gold bonds (SGBs) — government securities denominated in grams of gold — in six phases until September 3. This offers a good option to investors who can look forward to appreciation in gold prices at the end of the eight-year bond tenure.

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What are the terms of the issue?

The Sovereign Gold Bond Scheme 2021-22—Series I, issued by RBI, will be open for subscription for the period May 17-21, 2021. This will be followed by Series II (May 24-28), III (May 31-June 4), IV (July 12-16), V (August 9-13) and VI (August 30-September 3).

The nominal value of the 8-year bond works out to Rs 4,777 per gram of gold, based on the simple average closing price published by India Bullion and Jewellers Association Ltd (IBJA) for gold of 999 purity on the last three business days of the week preceding the subscription period of Series I (May 11, 12 and 14). There’s a discount of Rs 50 per gram to investors applying online, and the payment against the application is made through digital mode.

Gold bonds bear interest at a fixed rate of 2.50% per annum on the amount of initial investment which will be credited semi-annually. Bonds are sold through offices or branches of nationalised banks, private banks, foreign banks, designated post offices, Stock Holding Corporation of India Ltd. and the authorised stock exchanges either directly or through their agents.

What will investors get on redemption?

Investors gain from appreciation in gold prices as redemption of bonds will be based on the then prevailing prices. If gold prices treble after eight years, the investor will get the higher prices plus the 2.5% interest. If gold prices fall, which is unlikely, investors’ returns will fall accordingly. The investor does not lose in terms of the units of gold which he has paid for.

On maturity, the gold bonds will be redeemed in Indian rupees and the redemption price will be based on a simple average of closing price of gold of 999 purity of the previous 3 business days from the date of repayment, published by IBJA. Although the tenure of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year, 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.

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Will prices rise, and should you invest in gold?

While higher US bond yields and strengthening of the dollar put pressure on gold, leading to a fall in prices since the beginning of the calendar year, the bond yields have cooled over the last one month and the dollar too has weakened from 1.173 to a Euro on March 31 to 1.219 now. As such, gold demand and prices have picked up. Experts say that the prevailing uncertainty around rising coronavirus cases and geopolitical tensions will also push gold prices up.

“… It’s possible that the yellow metal has bottomed out and is headed for recovery. The fundamentals point to higher gold prices over the near to medium terms. Investors may step in and increase their allocation to 10-15% of their portfolio at these levels to benefit from the price appreciation that would probably follow…,” said Chirag Mehta, senior fund manager–alternative investments, Quantum Mutual Fund, in his report.

Financial planners say gold should form around 5-10% of an investors’ portfolio.

While Bitcoin prices witnessed a big intra-day crash on Wednesday, a senior official with an investment bank said, “The Bitcoin bubble could burst one day. This money will go to gold as the first choice… Once India is unlocked completely and manufacturing starts and people start buying gold, especially in Diwali and the winter wedding season, gold prices should go up. It’s (gold bond) available at a good price currently.”

After hitting a high of around Rs 58,000 per 10 grams in August 2020, the price of 24-carat gold in Delhi reached levels of around Rs 45,000 in March. On Thursday it was trading at around 48,500 per 10 grams.

Why should an investor buy gold bonds rather than physical gold?

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

What are the minimum and maximum limits for investment?

The bonds are issued in denominations of 1 gram of gold and in multiples thereof. The minimum investment will be 1 gram, with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April–March).

Can these securities be used as collateral for loans?

They 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 loans prescribed by RBI from time to time. Granting loans against SGBs would be subject to the decision of the bank/financing agency, and cannot be inferred as a matter of right.

What are the tax implications?

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. Indexation benefits will be provided to long-term capital gains arising to any person on transfer of bonds. TDS is not applicable on the bonds, but it is the responsibility of the holder to comply with tax laws.

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