RBI’s Sovereign Gold Bonds

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.

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

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.

Will prices rise, and should you invest in gold?

“… 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.

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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