Gold has traditionally been a major investment product available for the generations upto our parents. Even in the present era where various financial products available, financial planners advise investment of certain percentage in gold for diversification. Indian and specially females, are obsessed with gold, a major part of which is imported. Due to import of gold and oil the Indian currency is always under pressure. With the twin object of meetings the demand of investment in gold and ensuring that the balance of payments position is not adversely affected, the government has introduced monetization of Gold scheme in 2015. As a part of gold monetization scheme the government of India has been issuing Sovereign Gold Bonds (SGB) from time to time through Reserve bank of India. The RBI has announced issue of Sovereign Gold Bond Series for 2020 in monthly trances beginning from this month. The first tranche is open between 20th April 2020 till 24th April, 2020. Let us discuss the basic features of SGB.
Who can Invest in SGB and How
Any resident under Foreign Exchange Management Act (FEMA) can invest in SGB. So an Individual, HUF, Trust whether a public or private and Universities can invest in SGB. Even investment on behalf of a minor can be made by his guardian. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport are needed for buying the SGB. Additionally you need to have a PAN to invest in the bonds. Though an NRI himself cannot invest in these bonds through purchase of subscription, he is allowed to hold these bonds received as a nominee of a resident investor. The bonds can be bought from banks, Stock Holding Corporation, Post Offices and recognised stock exchanges.
The application for SGB has to be made in the minimum lot of 1 gram and in multiple of 1 gram maximum upto the permissible limits. An Individual and an HUF can invest upto 4 Kgs in SGB in each financial year. Other eligible entities can invest upto 20 Kgs in a year. While computing the limits the investments made through initial subscription and purchased both will be taken into account. The bonds can be held jointly but for the purpose of limit, it will be computed with reference to the first holder. The investors can make nomination in favour of any person in respect of the bonds subscribed or purchased by them.
Tenure and premature redemption of SGB
The gold bonds have tenure of 8 years but the investors have an option to opt for early redemption after completion of 5 years on the interest payment dates. The investors have the option to have the bonds in physical form or in demat form at the time of application. One can also get the physical certificates converted into demat at later stage. Though the bonds have lock in period of 5 years, investors can always get out of the bonds by selling on stock exchange.
Issue price and redemption price
The Sovereign Gold Bonds are issued at a nominal rate per gram. The nominal rate of the bonds is computed on the basis of simple average price of the 0.999 purity gold, as published by the Bullion and Jewellers Association Limited, of last three days of the week preceding the week in which the bonds are issued. For the current trance issue open the price per gram is fixed at Rs. 4,639/-
There are more issues every month till September 2020 as per the calendar issued by RBI. For the investors who apply online and pay through digital mode are entitled to get a discount of Rs. 50/- per gram. The bonds will be redeemed at the price of gold prevailing at the time of redemption. The redemption price of the bonds at the time of redemption will also be computed in the same manner as issue price.
Holder of the bond will receive interest annually @ 2.50% on the issue price payable half yearly.
Taxation of interest and the profit on redemption of the bonds
The interest received on SGB is fully taxable in the hands of the investors. However any profit made on redemption of the bonds will be exempt from capital gains tax. Please note that the exemption from capital gains is only available on redemption and not on sale on before redemption. In respect of bonds sold before redemption, you are entitled to avail the indexation benefit for computing capital gains.
Should you invest in Gold
As gold provides protection against inflation and also affords liquidity in the time of political and economic instability, one should have certain portion of his portfolio in gold. Since, In India, gold is gifted on all conceivable social occasions specially at the time of marriage of sons and daughters, one should invest in gold so as to have the gold readily available at the time of marriage in the family. As investments in gold through SGB earns you interest as well as appreciation. Since profits on redemption are tax free, you should invest in the bonds so as to synchronise the redemption with occasion of marriage. Even in emergency like situation one can get loan against these bonds by offering it as security, so to that extent the bonds are more liquid than many other investment products.
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Balwant Jain is a tax and investment expert and can be reached at firstname.lastname@example.org and on @jainbalwant his twitter handle