OPEN APP
Home / Money / Calculators /  Trading in gold bonds to improve liquidity

On 13 May, the finance ministry held a meeting to review the progress of two gold-based schemes—Gold Monetisation Scheme and Sovereign gold bonds. Representatives of public and private sector banks, Reserve Bank of India (RBI) and Bureau of Indian Standards (BIS) were also present, according to a 16 May press release. The aim of the meeting was to make the two gold schemes more popular. Of the two schemes, gold bonds are tradable. The fourth tranche of these bonds will soon be open for investments, and trading will start by the end of May.

The central government launched the gold bonds to provide an alternative investment route for gold so that demand for the precious metal in its physical form reduces.

The first tranche of the sovereign gold bonds was launched 5-20 November 2015, the second tranche during 18-22 January 2016 and the third tranche during 8-14 March. According to the release, the first three tranches were able to attract deposits worth 1,322 crore, while the total subscription denominated in units of gold was 4,916 kg.

How do the bonds work?

These bonds can be bought from banks and post offices after completing the required know-your-customer (KYC) documentation, which means giving identity and address proofs such as voter ID card, Permanent Account Number or passport. You can also buy these bonds jointly and in a minor’s name.

The bonds are denominated in multiples of grams of gold, with a basic unit being 1 gram. The minimum investment has to be worth 2 grams of gold. The maximum you can invest in a financial year is a value worth 500 grams. Tenure is of eight years and an exit option at the end of fifth year. Interest is 2.75% a year, which will be paid out half-yearly. The gold bonds will be listed soon on exchanges, which means you can exit in the secondary market before the bonds mature. The price of these bonds will be fixed on the basis of the week’s simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. Redemption will be done on the basis of prevailing price. Interest will be paid on the original value of investment.

Just like physical gold and gold exchange-traded funds (ETFs), you can use these bonds also to take a loan. The loan-to-value ratio will be the same as what has been decided for other gold loans by the RBI.

Taxability

The Finance Act, 2016, provides tax benefit on capital appreciation of gold bonds. “To support the government’s aim of reducing the demand for gold in physical form, the Act provides two-fold relief to holders of Sovereign Gold Bonds issued by RBI under the Sovereign Gold Bond Scheme 2015," said Neha Malhotra, executive director, Nangia & Co. “First, there is capital gain tax exemption on redemption (maturity) of bonds. Second, in case it is sold before date of redemption, indexation benefits shall be available to long-term capital gains arising from transfer," she added. But the half-yearly interest will be taxed. “It would be taxable as ‘income from other sources’," she said.

Should you invest?

For those who buy physical gold on a regular basis for investment, switching to gold bonds is better. Physical gold and gold bonds both carry the risk of price fluctuation, but in case of the latter, you receive additional interest—an extra earning that physical gold does not offer. Further, storing physical gold is difficult, while paper gold can be held in the demat form. Plus, there is high transaction charge on physical gold.

Gold exchange-traded funds (ETFs) issued by mutual funds have an inbuilt cost, which reduces returns, and there is no interest payout. But there is no maximum investment limit.

Gold bonds have the advantage of capital gains being tax exempt. This is not available on physical gold or gold ETFs.

“It (bonds) will indeed be the best way of investing in gold as it allows a consumer to participate in gold as an asset class," said Suresh Sadagopan, founder, Ladder7 Financial Advisories. “Those who want to invest in gold and have a long-term investment horizon can invest in this," he added.

So, if you are planning to invest in gold, the upcoming tranche could be an opportunity. Once trading starts, liquidity will also improve.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout