Sovereign Gold Bond Scheme - Everything To Know

Updated on: October 12, 2020

In the fiscal year 2020-21, Government of India through the Reserve Bank of India decided to issue Sovereign Gold Bonds in six tranches. The spree started in April, 2020 and ends in September 2020.

*Notification dated Oct 9, 2020: The Central Government in consultation with the Reserve Bank of India has decided to issue SGBs in six additional tranches between October 2020 and March 2021 under the 2020-21 scheme.

Sovereign Gold Bond Scheme 2020-21

The calendar followed this year is - 


In the year 2019-20, 10 tranches of Sovereign Gold Bonds (amounting to 6.13 tonnes) worth Rs. 2316 crore were issued.

This scheme was started in November 2015. Let's learn in detail in case you are weighing in the prospects of subscribing for this scheme.

To brief you all with the content. Here is how we are going to go about it:

  • What is a Bond?
  • What are Sovereign Gold Bonds?
  • Determining the initial price of SGBs
  • Details about Sovereign Gold Bonds Scheme 2020-21 - Series VI
  • Taxation Details and Subscription Limit on SGBs
  • Pros & Cons of SGBs

Note: Sovereign Gold Bonds are also referred to as 'SGB'. Just wanted to tell so that it's easy for you guys to understand while reading.

WHAT IS A BOND

Bond is a fixed income instrument that represents a loan made by an investor to the issuer of the bond. Bonds are typically issued by corporates, municipalities, state governments, central governments to finance projects and functioning of the organisation.


WHAT ARE SOVEREIGN GOLD BONDS?

  • Sovereign Gold Bonds are securities issued by the government through RBI. These securities are denominated in grams and are a substitute for holding physical gold.
  • Another point to note is that, investors have to pay cash to buy these bonds. Similarly, the bond can be redeemed only in cash on maturity. They cannot be redeemed for physical gold.
  • SGB prices are based on the price of 999 purity gold, published by the authorised institution, 'Indian Bullions and Jewelers Association'. This 999 purity gold is the 24 karat gold.
  • SGBs carry 2.5% (fixed simple interest rate) per annum on the amount of initial investment. Investors will receive the interest payment every 6 months.
  • By default, Sovereign Gold Bonds have a maturity time period of 8 years. But there is a provision in which after 5 years, RBI will redeem the security in case the bond holder wishes to sell. There is another provision in which in case the bond holder wants to extend the tenure of the bonds over the existing 8 years, it can be extended by three more years to make the total tenure of 11 years.


DETERMINING THE INITIAL PRICE OF SOVEREIGN GOLD BONDS

The base price of the bond is calculated based on the simple average of closing price of gold of 999 purity on the last three working days.

For online transaction, a discount of Rs. 50 is provided.


*updated

2020-21 SERIES VII SOVEREIGN GOLD BONDS ISSUE DETAILS

OFFER PERIOD - Monday, October 12, 2020 to Friday, October 16, 2020

Note: The bonds will be issued on October 20, 2020.

ISSUE PRICE - Simple average closing price for the period October 7 - 9, 2020 comes out to be Rs. 5,051/- (per gram of gold). 

For investors subscribing through online methods will get a discount of Rs. 50/-, effectively taking price of bond to Rs. 5,001/- (per gram of gold).

MATURITY - 8 years with exit option from 5th year to be exercised on interest payment date.                                                         Can be extended to 11 years as well.

TRADING ELIGIBILITY - Bonds will be eligible for trading from the date as notified by the RBI.

NOT ELIGIBLE TO ISSUE - Non residents of India (NRIs)


TAXATION

  • The interest on SGBs shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961).
  • The Capital Gain Tax is relaxed for individuals on redemption of the SGBs.
  • Indexation benefits can be availed by the bond holders if they wish to get rid of the security before 5 years.
  • If sold before 3 years of holding the Short Term Capital Gain (STCG) arising from the sale is added to the income of the investor on which tax is deducted as per the tax slab.
  • If the security is sold after holding the bond for 3 years, then the gain arising is considered as Long Term Capital Gain (LTCG). Investors have to pay 20% of the amount received as tax + 4 % CESS (with indexation benefit).

SUBSCRIPTION LIMIT

For Individuals:

Minimum purchase of 1 gram of gold and Maximum purchase of 4 kg of gold (per person) can be bought in a fiscal year (the April to March period).

For HUFs (Hindu Undivided Family):

Minimum purchase of 1 gram of gold and Maximum purchase of 4 kg of gold (per person) can be bought in a fiscal year (the April to March period).

For Trusts and other Institutions:

Minimum purchase of 1 gram of gold and Maximum purchase of 20 kg of gold (per institution) can be bought in a fiscal year (the April to March period).

For Joint Holders:

In this case, the holding limit of 4 kg will be applied to the first applicant only.

For all the above cases: Bids can made in multiples of 1 gram of gold and multiples thereof.


BENEFITS OF SGBs

Guarantee: 

As these are sovereign securities issued by RBI on behalf of the government, there is a guarantee that there will be no default on these bonds.

SGBs, just like digital form of gold or gold ETFs eliminate the risk of theft and cost of storage:

Physical gold kept at home may lead to insecurities for people as there is a chance of theft. For this reason people will prick out extra costs from their pockets to buy a good locker, etc to keep the commodity safe. In case of SGBs, they are held in the demat account and thus the above two cons of holding physical gold are mitigated.

Can be easily purchased through broker and stored on demat account: 

These securities can be bought via mobile app or websites of various brokers and stored on demat account. There are also offline methods to get your hands on these securities by purchasing from Post offices or commercial banks.


Tradeable on exchanges:

Since SGBs can be held in the demat accounts, they can be traded on stock exchange just like any other stock. Thus, in case the price of gold increases and one wants to sell and make profit, it is possible.


Free from issues like making charges and purity assessment of the commodity: 

When one buys physical gold or jewelry for that matter, there is dependence on some skilled person to assess the quality of the commodity and determine the price based on purity of gold. 

There is no such uncertainty in case of digital gold or these sovereign bonds. These securities are based on the purity of gold as specified in the guidelines.

Similarly where one has to pay making charges on physical gold, there is no such expense to be incurred in case of SGBs.


Investors are assured of the market value of gold at the time of maturity and periodical interest:

Market value of gold can be viewed at any given time on the internet and business news channels. And since price of Sovereign Gold Bonds are directly related to the spot price of gold when one sells these securities it will be based on spot price and thus, there is assurity. 

Plus, the government has assured an interest rate payment above the principal amount of investment.


The capital gains from redemption of the securities by RBI is not taxable:

Though the interest amount received from these bonds is taxable the gain that investors may receive after the 5th year when RBI will redeem the bonds if investor wishes to sell will completely go into the investors account without any tax deduction.


SGBs can also be used as collateral to avail loans.


DISADVANTAGES

Some small issues that people might feel:

The lock-in period: Your funds are invested into this scheme for at least 5 years. But that's not a really big deal because one can sell them in the stock market if one gets a good price.

Capital loss: SGB directly tracks the gold price, so if the gold price is lower at the time of redemption than what it is at the time one buys. It would lead to losses.

This is all important stuff related to Sovereign Gold Bonds. There are still two days left to subscribe for this security. The opportunity window closes after 3:30 pm on September 4.

I hope you have gained something from this article for sure. To validate any of the information above click on the links below to view the official circulars and documents.

Official Sources:

https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=50488

https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=50489

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*old info:

The Sovereign Gold Bond Scheme 2020-21 Series VI is available for subscription till Friday, 4th September, 2020This is the last tranche for 2020-21 scheme



2020-21 SERIES VI SOVEREIGN GOLD BONDS ISSUE DETAILS

OFFER PERIOD - Monday, 31st August, 2020 to Friday, 4th September, 2020

Note: The bonds will be issued on September 8, 2020.

ISSUE PRICE -     Rs. 5117 (per gram of gold) for offline purchase

                              Rs. 5067 (per gram of gold) for online transaction

MATURITY - 8 years with exit option from 5th year to be exercised on interest payment date.                                                         Can be extended to 11 years as well.

TRADING ELIGIBILITY - Bonds will be eligible for trading from the date as notified by the RBI.

NOT ELIGIBLE TO ISSUE - Non residents of India (NRIs)

For now, adios!

Stay Inquisitive 💡

Written by: Aastik Pasricha


Original Sources:

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11864&Mode=0

https://rbidocs.rbi.org.in/rdocs/content/pdfs/SGB13042020.pdf

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50279


Disclaimer: This blog is only for informational purposes and in now way tries to push anyone to invest in the securities mentioned above. Any decision to invest in these securities taken by a reader is his/her personal choice. Since investing involves some potential risk, it is advisable to consult a professional in the field or your fund managers.


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