Recently, Government of India, in consultation with the Reserve Bank of India (RBI), has decided to issue Sovereign Gold Bonds 2016-17 – Series III. Applications for the bonds will be accepted from October 24, 2016 to November 02, 2016. These Bonds are sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges. Here, GK Mantra provides in-depth information about Sovereign Gold Bonds in Question-Answer format.
1. What are Sovereign Gold Bonds (SGBs)? Who is the issuer?
Answer: SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.
2. Why should I buy SGB rather than physical gold? What are the benefits?
Answer: The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/premature redemption. The SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. Sovereign Gold Bonds are free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.
3. Are there any risks in investing in SGBs?
Answer: There may be a risk of capital loss if the market price of gold declines. However, the investor does not lose in terms of the units of gold which he has paid for.
4. Who is eligible to invest in the SGBs?
Answer: Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities, charitable institutions, etc.
5. Whether joint holding will be allowed?
Answer: Yes, joint holding is allowed.
6. Can a Minor invest in Sovereign Gold Bonds?
Answer: Yes. The application on behalf of the minor has to be made by his/her guardian.
7. What are the Know-Your-Customer (KYC) norms?
Answer: Know-Your-Customer (KYC) norms will be the same as that for purchase of physical form of gold. Identification documents such as Aadhaar card / PAN or TAN /Passport / Voter ID card will be required. KYC will be done by the issuing banks/SHCIL offices/Post Offices/agents. No separate KYC will be needed for receiving bank’s own customers.
8. What is the minimum and maximum limit for investment?
Answer: The Bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum buying limit of 500 grams per person per fiscal year (April – March). In case of joint holding, the limit applies to the first applicant.
9. What is the rate of interest and how will the interest be paid?
Answer: The Bonds bear interest at the rate of 2.50 per cent (fixed-rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.
10. Who are the authorized agencies selling the SGBs?
Answer: Sovereign Gold Bonds are sold through scheduled commercial banks (excluding RRBs), SHCIL offices and designated Post Offices either directly or through their agents.
11. At what price the bonds are sold?
Answer: Price of Sovereign Gold Bonds will be fixed in Indian Rupees on the basis of the previous week’s (Monday-Friday) simple average price for gold of 999 purity published by the India Bullion and Jewellers’ Association Ltd. (IBJA). The issue price will be disseminated by the Reserve Bank of India
12. What will I get on redemption?
Answer: On maturity, the redemption proceeds will be equivalent to the prevailing market value of grams of gold originally invested in Indian Rupees. The redemption price will be based on the simple average of previous week’s (Monday-Friday) closing gold price for 999 purity published by the IBJA.
13. How will I get the redemption amount?
Answer: Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond.
14. Can I encash the bond anytime I want? Is premature redemption allowed?
Answer: Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates. The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.
15. Can I use these securities as collateral for loans?
Answer: Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC). The Loan to Value ratio will be the same as applicable to ordinary gold loan prescribed by RBI from time to time.
16. What are the tax implications on i) interest and ii) capital gain?
Answer: Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.
17. Is tax deducted at source (TDS) applicable on the bond?
Answer: TDS is not applicable on the bond. However, it is the responsibility of the bond holder to comply with the tax laws.
18. Are institutions like banks allowed to invest in Sovereign Gold Bonds?
Answer: There is no bar on investment by banks in Sovereign Gold Bonds. These will qualify for SLR.
19. Can I get the bonds in demat form?
Answer: Yes. The bonds can be held in demat account. A specific request for the same must be made in the application form itself. Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to demat will also be available subsequent to allotment of the bond.
20. Can I trade these bonds?
Answer: The bonds are tradable from a date to be notified by RBI. It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges. The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006.