‘Bonding’ with gold: All about sovereign gold bonds

Over the years, options such as e-gold, gold mutual funds and gold exchange traded funds have emerged as promising alternatives for a populace crazed by physical gold. The newest kid on the block is sovereign gold bonds — issued by the government to dim the lure of physical gold and offer secure returns to investors. Four rounds or tranches have elapsed after these bonds were first issued on November 5, 2015. While the jury is still out on the response to the last tranche, the other three were well-received (or weren’t) depending on different perspectives. The bottomline is this: is this alternative to physical gold here to stay? Read on for a primer.

Are SGBs a better option for you?

Sovereign gold bonds (SGBs) are securities issued by the government to pull away investors from buying physical gold (that proves costly to the exchequer — this is a story for another time). Suffice to say that with India holding roughly a tenth of the world’s gold reserves (we import almost 1000 tonnes of gold per annum), weaning the public away to alternatives may prove a boon for the economy.

Benefits& Pitfalls

For those still unable to put that piece of gold jewellery away, here are some points to ponder while considering SGBs:

· It is safer as compared to physical gold, the accompanying risks of theft or storage do not arise.

· You can also hold SGBs in demat form, which does away with the issue of loss of certificates

· There is no need to worry about purity (the bonds track the prices of .999 purity gold), making charges as the gold units you have invested in is held in electronic form by the RBI and stays as it is until redemption.

· You can also purchase SGBs on the secondary market, however, capital gains on sale and transfer of these will be taxable.

· The bonds are priced based on the rate at which domestic gold ends in the week preceding the issue (the latest issue was priced at Rs 3,119 per gram)

· All individuals, HUFs, trusts, charities and universities can hold SGBs. You could also hold it jointly with your family members. The maximum that each member can invest in a financial year is 500 grams. However, NRIs are not currently allowed to invest in SGBs

Also consider the changes the government has made vis-à-vis the first three issues, so as to sweeten the deal for investors:

· Minimum investment limit has been reduced to 1 gram from 2 grams

· No capital gains tax will arise at the time of redemption (however, the interest income is taxable)

· The bonds can also be held in demat form

· You can now purchase the bonds from recognized stock exchanges (NSE, BSE) and the SHCIL as well

Other benefits include the fact that on sale, you will get the full value for units held (@.999 purity), as against physical gold, where there could be losses. You can also use these bonds as collateral for loans from banks.

Yet, there are two critical pitfalls in the scheme that should explain why the response to the bond issues has been tepid: Redemption and fixed interest.

The government offers a fixed interest of 2.75% per annum (on the initial investment) that may look miniscule as compared to other options in the same category such as gold ETFs and gold MFS, or other investment options such as shares, debentures, MFs, etc. In the current scenario, therefore, SGBs — while no doubt being secure, given the government’s backing — can be an option to diversify for those investors with an eye on gold. Also, note that SGBs can be now redeemed only after a minimum of 5 years, while the complete tenure is 8 years. Other risks include the volatility in gold prices; you therefore need to determine the right time of entry depending on market situations.

Tax

While the relaxation on capital gains tax at the time of redemption (after 5 years) is a bonus; however, long-term capital gains on transfer/ sale of these bonds will be taxable (though indexation is available).

Final word

While SGBs score on most points, vis-à-vis other investment options, the matter of returns and the period of holding are a sore point for investors who seek this as a wealth maximisation tool. At best, it is another egg in your (diversified) basket.