Sovereign Gold Bonds - A Golden Opportunity with triple benefits

Written on Tuesday, April 25, 2017
By Mohit Mittal - Head Fixed Income

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Gold is likely to glitter again for retail investors this Financial Year. The Government of India (GoI), in consultation with the Reserve Bank of India (RBI), has decided to issue sovereign Gold Bonds Series-I for 2017-18.

 

Sovereign Gold Bonds (SGBs) are issued by Reserve Bank of India on behalf of the Government of India; the bonds carry sovereign guarantee on payment of interest and repayment of principal on redemption / maturity. Benefits of investing in Sovereign Gold Bonds are as follows:

 

1.            Assurance of Safety: Govt of India Security

2.            Zero Risk of handling Physical Gold

3.            Easy Exit Options: Tradable on Exchange and Exit options after 5 years.

 

On 24th April 2017, RBI is coming up with Series I of Sovereign Gold Bond Issue offering Issue Price of Rs. 2,901/- (after discount of Rs. 50/- on the Face Value). The Issue is open till 29th April 2017 and considered to be a huge opportunity for Retail and HNI investors who are looking for Gold Investments. Also, investment in Gold is a hedging tool and a trusted diversification investment option. Secondly, investment in Gold Bonds eliminates the risk of keeping physical gold in custody. The investment in Gold Bonds qualify for the equal appreciation which physical gold offers in long term and in addition to it Sovereign Gold Bond offers 2.50% fixed interest rate per annum, making it more lucrative investment option.

 

SGBs are the best way to invest in Gold as they provide a unique combination of –

 

Scope for Capital Gains from participation in Gold price movement

 

Real Interest rate of 2.5% p.a. as regular income over and above capital gains, if any (Gold is widely considered as a safe haven and proxy for inflation). Interest received on the bonds shall be taxable.

 

Sovereign Guarantee on payment of investment value and interest

 

Tax benefits - Capital Gains on redemption are exempt from capital gains tax

 

Liquidity – Bonds are eligible for early redemption in 5th, 6th and 7th year and shall be traded on Stock Exchanges

 

Bonds can be used as collateral for loans with the same LTV (Loan to Value) ratio as physical gold

 

The value of SGBs is linked to the price of physical gold. An investor can participate fully in any future movement in Gold price; Possibility of gains / losses from Gold price rise / fall respectively

 

Transfer / sale of bonds before redemption / maturity date is NOT EXEMPT from Capital Gains Tax. Indexation benefits on long term capital gains shall however be available for such transfer / sale if it qualifies as a long term capital gain

 

Key Features:

The bonds issue is opening for subscription from April 24, 2017 to April 28, 2017
    
Issue price for April’17 tranche is Rs.  per gram.
   

Price of bonds is fixed on the basis of previous week’s average closing price of Gold of 999 purity published by IBJA. Issue price of Bonds in this issue / tranche carries a discount of Rs. 50 per gram
    
Redemption price – will be fixed based on previous week’s average closing price of Gold of 999 purity published by IBJA
    
Bonds to be denominated in multiples of gram(s) of Gold with basic unit of 1 gm
    
Minimum permissible investment will be 1 unit i.e. 1 gram of Gold
    
Maximum amount subscribed by any entity cannot be more than 500 gms per person per fiscal year (April-March)
    
Coupon of 2.5% p.a. payable half yearly on the initial value of investment
    
Bond Tenor at 8 years with option to exit from 5th year onwards to be exercised on interest payment dates

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