Sovereign bond: The new gold standard

Sovereign bond: The new gold standard

The interest component of the Centre's new schemes give them an edge over other gold investing instruments, making them the most lucrative within the asset class.

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The bonds will be issued in rupee. They will be issued in denominations of 5,10,50,100 grams of gold or other denominations.

Fixed interest rates of up to 3 per cent per annum, favourable tax treatment on capital gains and absence of distribution costs for investors are some of the features included in the sovereign gold bond (SGB) scheme, making it one of the best gold investing options, once made available.

On Wednesday, the government introduced its much-awaited gold bond scheme that was announced in the Union Budget 2015-16. Other than offering a sovereign guarantee, the bonds propose to offer annual interest that will be decided by the government every year.

Indications are that it could be anywhere between 2-3 per cent. Investors can not only use the bonds as collateral for loans, but can also sell it before its maturity since they would trade on the exchanges.


Even on the tax front, the government is looking to make it sweet. A statement issued on Wednesday clearly states that in the next Budget, the government may propose to offer indexation benefit (capital gains adjusted against inflation) on long-term capital gains that arise on account of sale of bond prior to the maturity and also exemption of capital gains at the time of redemption of the bonds on maturity.


Financial planners say that on the face of it, the scheme looks as a very attractive gold investment option.

“While ETFs track the gold price and generate returns equivalent to the change in price of gold and were considered as the best gold investment option till date, sovereign gold bonds, even if they offer interest rate of up to 2 per cent will emerge as the most attractive option,” said Pankaj Mathpal, CFP and founder Optima Money Managers. He further added that since the government has said that sales and distribution of the issuing agency will be reimbursed by the government, it will make it even more attractive as customers will save on distribution cost.

If gold jewellery was the primary form of gold buying and investing till a decade back, the demand for coins and bars have grown significantly over the last few years. As per official estimates while gold imports amount to over 1,000 tonne annually, around 300 tonne of physical bars and coins are purchased every year.

So, those looking to invest in gold may find gold bonds a better option for investing in gold than buying physical gold or investing in gold ETFs or funds of mutual funds.

Tax treatment of sovereign bonds

Experts feel that the attractiveness of the instrument and thereby its success will largely depend on the tax treatment of capital gains on account of rise in gold prices in the sovereign gold bonds. While the government has said that the Department of Revenue in the Ministry of Finance has agreed to bring in amendments to the existing provisions of the Income Tax Act, for providing “indexation benefits on long-term capital gains arising on transfer of bond” and for “exemption for capital gains arising on redemption of SGB” in the forthcoming 2016-17 Budget, experts feel that there needs to be more clarity.

Jitendra Solanki, a certified financial planner and a Sebi-registered investment adviser, however, said that the government’s statement on indexation benefit suggests that it will be provided on all capital gains booked after the completion of the third year and before the maturity of the bond but the fact that they will be exempted on redemption of SGB needs clarity. “Except for equities no instrument gives the nil taxation benefit. I think the government will provide benefits under Section 54F where the capital gains arising from the instrument will be exempt if they are re-invested in bonds issued by National Highways Authority of India or Rural Electrification Corporation that provide benefit under Section 54EC,” said Solanki.

While the returns would largely depend on the capital gains on account of rise in price of gold, others too agree that the interest component in the bond gives it an edge over other gold investing instruments.

Should you raise your gold kitty for these bonds

Even though these bonds look attractive and one may think of going for additional investment into it, experts feel as the investment is gold investment, investors should stick to their asset allocation and not stretch beyond what should be the right exposure to gold. “Ideally the investment into gold should be around 10 per cent of the total assets. One should stick to the asset allocation and investments into sovereign gold bonds, if planned, should be within that limit,” said Solanki. Therefore investors can move from buying gold in physical form or even in the form of ETF to sovereign corporate bonds. One should not look to move their debt or equity investments towards gold.

The gold monetisation scheme

If gold bond scheme is being seen by advisers as an attractive instrument for investors which may also help the government in meeting its target of reducing the import of physical gold, they do not see too many people going for the gold monetisation scheme.

Experts say that not only is there hesitation among individuals to go ahead and get their jewellery melted but investors are also wondering if the rates would be close to the interest rates offered on savings bank accounts.

Within the gold monetisation schemes that include the revamped gold deposit scheme (GDS) and the gold metal loan scheme, individuals and institutions can deposit a minimum of 30 grams of gold bullion or jewellery (after getting its purity verified) into a gold deposit account and earn interest on it. There are indications from government officials that the interest rates on GDS could be around 2 per cent.

Along with this, the government has stated that tax benefits under GDS 1999 that provides exemption from wealth tax, capital gains tax and income tax on interest income would be applicable on the new scheme as well. But the most important factor — interest rates — have yet to be finalised by the finance ministry in discussion with the Reserve Bank of India.

The GDS 1999 had an interest rate ranging between 0.75 per cent and 1 per cent for tenures between three to five years and market experts say that if higher returns are offered then individuals can utilise this scheme as a good option to earn income on their idle gold.

The bond benefits:
The bonds will be issued in rupee. They will be issued in denominations of 5,10,50,100 grams of gold or other denominations. An upward investment cap of 500 grams per person per year would be made available at banks, NBFCs, post offices etc. While individuals may look to invest in them, here are five factors that make it attractive.

Interest rates: All other gold investing instruments only offer returns tracking gold prices. However, sovereign bonds look to offer interest rates over and above the capital gains on account of price rise. It could go up to 3% per annum.

Loan against bond: While individuals can hold the bond and earn interest and capital gains over the term of the investment, in need of money they can even go to a bank and offer the bond as collateral to take loan against it at a loan-to-value ratio permitted by RBI.

Distribution cost: The details of the scheme state that all cost relating to distribution and sales commission that will be borne by the issuing agency will be reimbursed by the government.

Tax benefits: the government has proposed to announce tax benefits on capital gains in the upcoming budget 2016-17.

Liquidity: While the minimum tenor of the bond is likely to be 5-7 years, the bonds can be sold anytime as they would be traded on exchanges and thus will allow easy exits.

Interest rate: The new scheme which is on the lines of GDS 1999 seeks to offer a higher interest rate. While the 1999 scheme offered interest between 0.75 per cent and 1 per cent for tenures between three to five years, the new scheme can offer up to 2 per cent.

Minimum deposit and tenor: The scheme would allow individuals to deposit a minimum of 30 grams of gold bullion in the account and it can be deposited for a short-term (one to three years); medium-term (five to seven years) and long-term (12-15 years).

Gold deposit and redemption: Jewellery and coins held by individuals will have to be taken to the purity testing centre and will have to be melted before they can be deposited into the gold account. While redemption in case of short term deposits can be done in either cash or gold, in case of medium and long term it would be only cash.


Gold monetisation scheme: While India is a huge importer of gold, the government, in a bid to reduce imports of the yellow metal, has proposed the gold monetisation scheme that aims to bring domestically held gold into circulation by encouraging individuals to get the metal melted, deposit it with banks and also earn interest on it. Above are three important aspects of the scheme.

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