The Union Government (Finance Ministry) in consultation withReserve Bank of India (RBI) has launched first tranche of sovereign gold bonds (SGBs) for current fiscal (FY 2018-19). It will be sold through banks, designated post offices and recognised stock exchanges namely NSE and BSE and Stock Holding Corporation of India Limited (SHCIL).
Households in India hold large amount of their savings as physical assets such as gold, silver and other precious metals and real estate. Gold especially has for long held tremendous attraction both as investment avenue as well as store of value. Indian households and temple trusts are estimated to be holding as much as 22,000 tonnes of gold. The ever increasing demand for gold has been putting serious pressure on import bill of India, impacting growth and investment. The Union Government had launched sovereign gold bond, gold monetisation scheme and Indian gold coin in 2015. These schemes were aimed at reducing physical demand for gold, bring into circulation idle gold lying with households, discourage its import and curb its damaging impact on trade balance.
Sovereign Gold Bond (SGB) Scheme
SGB Scheme is aimed at providing alternative to buying physical gold. Under it, bonds are denominated in units of one gram of gold and multiples thereof. These gold denominated bonds are restricted for sale to resident Indian entities, including individuals, Hindu undivided families (HUF), trusts, universities and charitable institutions.
The minimum subscription for individual and HUF is 1 gram and maximum is 4 kg. For trusts and similar entities, maximum subscription is 20 kg per fiscal. Price of bond is fixed in rupees on basis of simple average of closing price of gold of 999 purity published by India Bullion and Jewellers Association Limited for last 3 working days of week preceding the subscription period.
The tenor of SGB bonds is 8 years with provision of premature cancellation after 5 years on interest payment dates. Investors in SGB bonds have been provided with option of holding them in physical or dematerialised form. RBI has notified rate of interest of 2.50% per annum on SGB bonds is payable on half yearly basis.
The bonds can be used as collateral for loans and loan-to-value ratio is set equal to ordinary gold loan mandated by RBI from time to time. Individual investing in it are exempted from capital gains tax arising on redemption of SGB. The indexation benefits are also provided to long-term capital gains arising to any person on transfer of bond.