10 things to know before investing money in Sovereign Gold Bonds

10 things to know before investing money in Sovereign Gold Bonds

The scheme has many attractions. For instance, the capital gains tax arising on redemption of SGB to an individual has been exempted.

If you want to earn returns which are linked to the price of gold, then get ready to buy sovereign gold bonds. The Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds 2016-17–Series IV.

The scheme has many attractions. For instance, the capital gains tax arising on redemption of SGB to an individual has been exempted. However, in case of long-term capital gains (LTCGs), the indexation benefits will be provided to any person on transfer of bond. These bonds can also be used as security while taking loans against them.

The bonds will be open for subscription from February 27, 2017 to March 03 2017. These bonds will be available in both demat and paper form. If you are meeting the eligibility criteria, then by providing a valid identification document and also sending the application money on time, you will be able to receive the allotment.

Here are ten things which you must know before investing in Sovereign Gold Bonds:

1. What is Sovereign Gold Bond?

Sovereign Gold Bond (SGBs) are government securities which are denominated in grams of gold. They are, in fact, issued as a substitute for holding physical gold. Here investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The bond is issued by the RBI on behalf of the Government of India.

2. Why should you buy SGB rather than physical gold?

The quantity of gold for which the investor pays is protected, unlike physical gold which you need to protect by yourself. Therefore, the risks and costs of storage are eliminated in case of investing in SGB. You also receive the ongoing market price at the time of redemption/ premature redemption. Despite holding in the demat form, the SGB offers a superior alternative to holding gold in the physical form. Investors are assured of the market value of gold at the time of maturity and periodical interest. Since it is bond, SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in the demat form, eliminating the risk of loss of scrip etc.

If you want to earn returns which are linked to gold price, then get ready to buy sovereign gold bonds. The Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds 2016-17–Series IV.

There is no change as such. KYC norms are the same as that for the purchase of physical form of gold. You need to provide identification documents such as Aadhaar card/PAN /Passport / Voter ID card. KYC will be done by any of the following – issuing banks, SHCIL offices, Post Offices or agents. No separate KYC will be needed for receiving the bank’s own customers.

4. What is the minimum and maximum limit for investment?

The bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the bond is one gram with a maximum buying limit of 500 grams per person per fiscal year (that is from April to March). In case of joint holding, the limit applies only to the first applicant.

5. What are the tax implications on the interest rates and the capital gain?

The interest earned on the bonds will be taxable as per the provisions of the I-T Act. The capital gains tax, which if arises on redemption of SGB to an individual, has been exempted. However, the indexation benefits will be provided to long-terms capital gains if arises to any person on the transfer of bond.

It is to be noted that TDS is not applicable on the bond. But, it is the utmost responsibility of the bond holder to comply with the tax rules and regulations.

6. What will you get on redemption?

At the time of redemption, that is on maturity, all the proceeds will be equivalent to the prevailing market value of the grams of gold originally invested in Indian denomination. The redemption price is based on the simple average of previous week’s (Monday-Friday) closing gold price for 999 purity published by the IBJA. 

7. What is the rate of interest?

The bonds bear the rate of interest at 2.75 per cent, which is a fixed rate per annum on the amount of initial investment. The given interest gets credited semi-annually to the bank account of the investor and the last interest is payable on maturity along with the principal.

8. What is the time period to encash the bond?

In normalcy, the tenor of the bond is 8 years. Early encashment or redemption of the bond is allowed only after the fifth year from the date of issue on coupon payment dates. The bonds are tradable on exchanges, if they are held in demat form. They can also be transferred to any other eligible investor.

9. How can you gift the bonds to a relative or friend on some occasion?

The bond can be gifted or transferred to a relative, friend, or anybody who fulfills the eligibility criteria. That is, a person resident in India as defined under the Foreign Exchange Management Act, 1999, where eligible investors can be an individuals, HUFs, trusts, universities, charitable institutions, etc.

The bonds are transferable adhering to the rules mentioned under the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer, which is available with the issuing agents. 

10. How to get exit from the investment?

In case of premature redemption, investors can approach either of the concerned bank, SHCIL offices, Post Office or agent thirty days before the coupon payment date. The request for premature redemption can only be accepted if the investor approaches the concerned bank or the post office at least one day before the coupon payment date. Whatever the maturity proceeds be, it will get credited to the customer’s bank account provided at the time of applying for the bond.

(With inputs from RBI website)