What is the Sovereign Gold Bond?
The Government of India has recently launched the Sovereign Gold Bond (SGB) Scheme as an alternate investment form to physical gold. Investors will get returns based on the prevailing gold price. Since this is a bond, it can be held in demat or physical paper form.
Salient features of Sovereign Gold Bonds
The tenure of the bond is 8 years with exit options at the end of the 5th, 6th and 7th year.
Bonds can be used as collateral for loans.
Bonds will be traded on the exchange thus providing investors with the opportunity to exit early.
Bonds will carry sovereign guarantee both on capital invested and the interest.
FAQs on Sovereign Gold Bonds
1. Why buy SGB instead of physical gold?
The quantity of gold for which the investor pays for is protected due to the fact that the SGB is guaranteed to receive the ongoing market price at the time of redemption/ premature redemption.
The SGB offers a superior alternative to holding gold in physical form because it frees the investor from bearing the risks and costs of storage. Investors are assured of the market value of gold at the time of maturity and periodical interest.
SGB is free from purity issues and making charges
which are incurred when gold is held in jewelry form.
2. Who are eligible to invest in the bonds?
Any person who is a resident in India, as per the tenets of the Foreign Exchange Management Act, 1999,is eligible to invest in the bond. Besides individuals, HUFs, trusts, universities, and charitable institutions are also eligible to invest. Joint holding of the bond is allowed and minors can also hold the bond provided the application is made by the guardian of the minor.
3. What is the minimum and maximum limit for investment?
The bonds are issued in denominations of one gram of gold and the minimum investment which can be made is one gram. The maximum is 4 kg per individual in a particular financial year. In case of joint holding, the limit applies to the first holder.
4. What is the price of the Sovereign Gold Bond?
The price of one gram will be equivalent to the one gram of 999 purity gold. For price calculation purpose the average price of the last 3 working days of the previous week’s gold price will be considered.
5. What is the interest rate and how it will be paid? Is the interest taxable?
The interest rate as fixed by the Government of India is 2.50 % and the interest is payable semi-annually. Interest on the bonds is taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961).
6. What about the applicability of Capital Gains Tax?
Capital gains tax treatment will be the same as that for physical gold. The department of revenue has stated that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption will be allowed at the time of redemption.
7. How does the government gain by issuing the SGB?
In India, demand for physical gold is amongst the highest in the world. This causes the government to import physical gold in large quantities which in turn is a drain on the foreign exchange reserve.
Issuance of the SGB will help in reducing the physical demand and thus bring down the import bill for physical gold, considerably. The foreign exchange thus saved can be channelized to strengthen India’s economy.
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