Understanding Sovereign Gold Bond Scheme

Written on Monday, October 3, 2016
By Mr. Anil Chopra - Group CEO & Director, Bajaj Capital

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Sovereign Gold Bond Scheme was launched by Reserve Bank of India on behalf of the Government of India. Sovereign Gold Bond Scheme is an indirect way of investing in Gold. Instead of buying physical gold, investors can buy gold in paper form through Sovereign Gold Bonds. The underlying asset for these bonds is Gold.

 

The quantity of gold, for which the investor pays, remains protected and at the time of redemption/ premature redemption, investor receives the ongoing market price for that quantity of gold. The scheme offers a superior alternative to holding gold in physical form. The risks and costs of storage get eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest.

 

As investors will get returns that are linked to the gold price, the scheme is expected to offer the same benefits as physical gold. They can be used as collateral for loans and can be traded on stock exchanges to provide liquidity.
Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of gold. Minimum investment in the bond shall be 1 gram. The bonds can be bought by Indian residents or entities and are capped at 500 grams.

 

1. The Sovereign Gold Bonds will be available both in demat and paper form.

2. The tenor of the bond is for a minimum of 8 years with the option to exit in 5th, 6th and 7th year.

3. Eligible investors include individuals, HUFs, trusts, universities, charitable institutions, etc.

4. They will carry a sovereign guarantee both on the capital invested and the interest.

5. Bonds can be used as collateral for loans.

6. Bonds would be allowed to be traded on exchanges to allow early exits for investors, who may so desire.

 

The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on the redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on the transfer of the bond.

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