Sovereign Gold Bonds: 20 Must Know Features Before Investing

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The Government of India has decided to issue Sovereign Gold Bonds on November 26, 2015. The application for the same will be accepted from November 05, 2015 to November 20, 2015.

Individuals can buy Sovereign Gold Bonds through banks and designated post offices.

The main aim of the government to launch gold bonds is to reduce investors interest from buying coins and gold bars.

Sovereign Gold Bonds: Should You Invest In It?

Sovereign Gold Bonds: 20 Must Know Features Before Investing

20 Must Know features to consider before investing

No.FeaturesDetails
1Product nameSovereign Gold Bond
2EligibilityThe Bonds will be restricted for sale to resident Indian entities including individuals, HUFs, trusts, Universities, charitable institutions.
3DenominationThe Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
4TenorThe tenor of the Bond will be for a period of 8 years with exit option from 5th year to be exercised on the interest payment dates.
5Minimum sizeMinimum permissible investment will be 2 units (i.e. 2 grams of gold).
6Maximum limitThe maximum amount subscribed by an entity will not be more than 500 grams per person per fiscal year (April-March). A self-declaration to this effect will be obtained.
7Joint holderIn case of joint holding, the investment limit of 500 grams will be applied to the first applicant only.
8FrequencyThe Bonds will be issued in tranches. Each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification.
9Issue pricePrice of Bond will be fixed in Indian Rupees on the basis of the previous week's (Monday–Friday) simple average of closing price of gold of 999 purity published by the India Bullion and Jewellers Association Ltd. (IBJA).
10Payment optionPayment for the Bonds will be through electronic funds transfer/cash payment/ cheque/ demand draft.
11Issuance formGovernment of India Stock under GS Act, 2006. The investors will be issued a Stock/Holding Certificate. The Bonds are eligible for conversion into demat form.
12Redemption priceThe redemption price will be in Indian Rupees based on previous week’s (Monday-Friday) simple average of closing price of gold of 999 purity.
13Sales channelBonds will be sold through banks and designated Post Offices, as may be notified, either directly or through agents.
14Interest rateThe investors will be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.
15CollateralBonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.
16KYC DocumentationKnow-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required.
17Tax treatmentThe interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961) and the capital gains tax shall also remain same as in the case of physical gold.
18TradabilityBonds will be tradable on exchanges/NDS-OM from a date to be notified by RBI.
19SLR eligibilityThe Bonds will be eligible for Statutory Liquidity Ratio.
20CommissionCommission for distribution shall be paid at the rate of 1% of the subscription amount.

Risk Involved

Investors should note that upside gains and downside risks will be borne by investor and should be aware of the volatility in gold prices. As the bonds track the gold prices and at the moment gold trending upwards is difficult. For now, gold rates are tracking the US Federal Reserve on interest rate hike.

If the US Fed hikes interest rates as widely expected in its policy meet later this month, gold prices would fall.

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