Sovereign Gold Bond (SGB) Scheme was initially launched in 2015 by the Government of India. Sovereign Gold Bond is basically a government security denominated in the grams of gold. These Sovereign Gold Bonds are a better substitute than holding gold in physical form. Sovereign Gold Bonds are issued by RBI on behalf of the Government of India. Currently, RBI has restarted the Sovereign Gold Bond Scheme in which these gold bonds will be sold every month from October 2018 to February 2019.
Why this scheme was launched?
There is a term in economics, called as Current Account Deficit. Current Account Deficit is basically the net difference between imports and exports done by a country in a financial year. It occurs when our imports are more than our exports, otherwise, it will be a current account surplus. A major chunk of our imports is crude oil, gold, etc. India imported 880 tonnes of gold in 2017, according to data compiled by precious metals consultancy GFMS, a division of Thomson Reuters. To import that much amount of gold, we need to pay in dollars and that results in a decrease in our Forex (foreign exchange) Reserves. And you must be better aware that decreased forex reserves beyond a limit can invite Balance of Payments crisis, which took place in 1991 in India.
The demand for gold among the public is basically for two reasons. One is obviously in the form of jewellery while the other portion of demand in for speculative investment. Speculative investment means when people purchase gold by a thought that they will sell it back when market prices of the gold will be higher. But do we really need physical gold to do so? The answer is a BIG NO & that’s why the government came up with this Sovereign Gold Bond scheme.
According to the scheme, RBI issues gold bonds which can be subscribed by anyone. It is just like purchasing the physical gold because the value of gold bond varies as per the market prices of physical gold. And to attract the investors, an Interest rate of 2.5 per cent is also offered on gold bonds which is not available on physical gold.
Highlights of Sovereign Gold Bond Scheme
- Sovereign Gold Bonds are issued by RBI on behalf of Government of India.
- SGB is free from issues like making charges and purity in the case of gold in jewellery form.
- A person who is resident in India as defined under Foreign Exchange Management Act, 1999 is eligible to invest in SGB. Eligible investors include individuals, HUFs (Hindu Undivided Families), trusts, universities and charitable institutions.
- Minors can also invest in this scheme. However, the application on behalf of the minor has to be made by his/her guardian.
- You must quote your PAN number in order to invest in this scheme.
- The Gold Bonds are issued in denominations of one gram of gold and in multiples of one gram. The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).
- This means an individual can subscribe gold bonds of up to 4 kg per fiscal year i.e. If I had bought the gold bond of worth 4 kg in 2017-18, I can again buy gold bonds of up to 4 kg in 2018-19.
- Each family member is eligible to subscribe up to 4 kg of gold individually. While joint holding is also allowed.
- 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.
- Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.
- The Sovereign Gold Bonds can 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.
- This scheme was basically launched to cut down gold imports so that Current Account Deficit will be less.
- Payment for gold bonds can be done with demand draft, cheque, online banking. While cash payments of up to 20,000 rupees are allowed. An additional discount of 50 rupees is offered on per gram of gold if payment is done via online mode.
- Sovereign Gold Bonds are traded on the stock exchange within a fortnight of issuance (only bonds held in de-mat form with depositories can be traded in stock exchanges). This provides an early exit option to investors.
- The tenor of the gold bond is 8 years, while early exit options are available at the end of the fifth, sixth and seventh year.
- The capital gains tax arising on redemption of SGB to an individual has been exempted.