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What Are The Advantages And Disadvantages Of The Sovereign Gold Bonds

Sovereign Gold Bond is a scheme launched last year by the government of India to curb the demand for physical gold which was weighing on the import-export of the country.

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Sovereign Gold Bond is a scheme launched last year by the government of India to curb the demand for physical gold which was weighing on the import-export of the country.

 

These bonds will be issued by Reserve Bank India on behalf of the Government of India.

The bonds denomination will be in multiples of a gram(s) of gold with basic unit of 1 gram. The bond tenure will be for a period of 8 years where one will have the option to exit from 5th year.

Here are some advantages ad disadvantages of investing in Sovereign Gold Bonds:

Interest payments

Interest payments

Sovereign gold bonds would pay interest on the certificates so issued. This is a major advantage of investing in SGB as investing in physical gold, Golf ETF will not earn any interest.

Sovereign Gold Bonds currently pay an interest of 2.50 per cent per annum. This rate of interest will be calculated on the value of the gold at the time of investment. The rate can be a floating or a fixed rate, as decided.

Tax Benefits
 

Tax Benefits

There is no TDS applicable on the interest part while interest will be taxable as per the provisions of the Income-tax Act.

Indexation benefit will be applicable if the bond is transferred before maturity. Which means is that the indexation benefit will be provided to long tern capital gains arising to any person on the transfer of bonds. 

An investor can avail capital gains tax exempt on redemption not applicable if redeemed before maturity. Else, the capital gains tax treatment will be the same as for physical gold for an 'individual' investor.

Demat

Demat

SGB is available both on paper as well as Demat format. Which eliminates risk and cost of holding and storage of physical gold.

Also, SGB investors are allowed to trade on exchanges for an early exit. The bonds can be sold and transferred as per provisions of Government Securities Act.

Loans

Loans

Loans can be availed from these gold bonds and can be used as collateral for loans. The Loan to Value ratio will same as applicable to physical gold loan which is regulated by the RBI.

As bonds will be sold through banks and designated Post Offices one can apply for the loan at the same place.

Investment Options

Investment Options

The SGB will be issued in tranches and it tranche will be kept open for a period to be notified. Bond payment can be made through cash, cheques, demand draft, or electronic fund transfer.

Know-your-customer (KYC) norms is mandatory for but SGB. KYC documents such as Voter ID, Aadhaar card, PAN, Passport will be required.

Individuals, HUFs, Trusts, Universities and Charitable institutions are eligible to opt for Sovereign Gold Bonds.

Disadvantages

Disadvantages

The bonds have a 5 years lock in period and is not eligible for redemption. As the bonds track the gold price, if the gold price during the bond maturity period is lower than the present day, then you will end up in loss.

The point here is investor will not lose on the units of gold as units will remain fixed, only prices may fluctuate.

Read more about: sovereign gold bonds
Story first published: Wednesday, October 26, 2016, 10:49 [IST]
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