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This article is written by Vedant Saxena from Rajiv Gandhi National University of Law, Punjab. The article delves into the Sovereign Gold Bond scheme 2020-2021 launched by the central government and analyzes its benefits and limitations.

Introduction

The sovereign gold bond scheme was issued by the central government in November 2015.

This scheme enables investors to purchase gold bonds at comparatively lesser prices. In a statement by the Reserve Bank of India, the prices at which the gold bonds would be made available to the public has been fixed at 5051 rupees per gram of gold. Additionally, with a motive of encouraging digitization, the Reserve Bank of India also declared a discount of 50 rupees per gram less than the face value to the investors who apply online. 

In the context of sovereign gold bonds, subscriptions need to be made in terms of the prices of grams of gold. Gold bonds are usually disbursed after a time period of eight years. From the fifth year onwards, premature withdrawal is permitted. An individual could invest a minimal amount equivalent to one gram of gold. The maximum permissible limit of investment for individuals and Hindu undivided families is equivalent to the cost of four kilograms of gold, and for corporations and trusts, it is equivalent to the cost of twenty kilograms of gold.

The prices of a sovereign gold bond 2020 is determined by calculating the average of the closing prices of 999 purity gold. The government aimed at limiting the purchase of physical gold, and have people employ their domestic savings, used for the purchase of standard gold, into financial savings.

What is Sovereign Gold Bond

Sovereign gold bonds are certificates mandated by the Reserve Bank of India. One of the most significant advantages of sovereign gold bonds is that they allow an individual to invest in gold, without having to bother about the ins and outs of safekeeping. Due to their ever-increasing demand in the market, the prices of gold are liable to rise a significant deal over time. Therefore, these bonds also act as a fairly secure way to invest in gold.

Since sovereign gold bonds are issued by the Reserve Bank of India within the scope of Government of India stocks, a specific window is available for membership. During this period, a sovereign gold bond scheme is issued under the title of investors, in specific portions referred to as trenches. Usually, every couple of months or so, the Reserve Bank of India declares issuance of the recent sovereign bonds through a press release. A one week window is provided, in order to have individuals subscribe to this scheme. 

Features of Sovereign Gold Bonds

Upgraded cost –In order to calculate the prices of a sovereign gold bond 2020, the average of the closing prices of 999 purity gold is taken into consideration. These prices are for the final 3 days, and were decided by the Indian Bullion and Jewelers Association Limited (IBJA).

Periodic interest pay-outs – With reference to the sovereign gold bond scheme, a coupon rate of 2.5% per annum is issued, and is distributed to the investors on a half-yearly basis.

Fixed tenor – Under usual circumstances,  gold bonds are usually disbursed after a time period of eight years. From the fifth year onwards, premature withdrawal is permitted. Further, the investors could also sell off their securities in the secondary market, at the very market rate of gold.

Premature withdrawal –Many investors desire cashing in their investment. In order to do so, the investors would first have to fulfill a compulsory holding period of five years. Therefore, this benefit could be exercised by the investors who are either in their fifth, or sixth, or seventh year of the bond tenor.

Resale – As stated above, the investors could also sell off their securities in the secondary market, at the very market rate of gold. In order to trade the sovereign gold bond scheme 2020 in the secondary market, the following conditions need to be satisfied-

  1. Only after a time period of fourteen days could the sovereign gold bond scheme 2020 be traded.
  2. The Reserve Bank of India also needs to approve of it, by issuing a notice concerning the matter.

The costs at which these bonds are executed depend both on the current gold costs on the concerned date, and its prevailing demand and supply in the stock market. As a result of this, a holding certificate needs to be digitized and stored in the Demat account of an investor, in order to go about transactions in the stock market.

The quantity of subscription– In the context of sovereign gold bonds, subscriptions need to be made in terms of the prices of grams of gold. An individual could invest a minimal amount equivalent to one gram of gold. With respect to the maximum permissible limit of investment:

  • For individuals and Hindu undivided families, the maximum permissible limit of investment is equivalent to the cost of four kilograms of gold.
  • For corporations and trusts, the maximum permissible limit of investment is equivalent to the cost of twenty kilograms of gold.

When the sovereign bond matures, the prices of the sovereign gold bond are determined by calculating the average of the closing prices of 999 purity gold. These prices are for the final 3 days, and were decided by the Indian Bullion and Jewelers Association Limited (IBJA).

Advantages of Investing in Sovereign Gold Bonds

Low risk

Sovereign gold bonds are certificates mandated by the Reserve Bank of India, on behalf of the central government. These bonds act as a fairly secure way to invest in gold, since the chances of default on repayment are nil. If at all, the only risks could be associated with the fluctuations in the market prices of gold, although gold prices are seldom subject to frequent fluctuations.

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Convenience

The central government had launched the sovereign gold bonds in November 2015, under the gold monetisation scheme. The government’s primary motive was to reduce unwanted hassles involved in the investment. For instance, sovereign gold bonds allow an individual to invest in gold, without having to bother about the ins and outs of safekeeping.

A Holding certificate is issued to an individual who purchases a gold bond. The costs at which sovereign gold bonds are executed depend both on the current gold costs on the concerned date, as well as its prevailing demand and supply in the stock market. As a result of which, a holding certificate needs to be digitized and stored in the Demat account of an investor, in order to go about transactions in the stock market.

Capital appreciation

Gold has been one of the most significant substances in human history, and thus its market value has always been more or less on the higher side. On account of the ever-increasing demand for gold, the prices of gold tend to rise significantly over time. Therefore, an individual purchasing a sovereign gold bond is assured of a handsome return on his investment. Additionally, the prices of gold are usually not subject to frequent fluctuations. Hence, owing to its reliability, a number of individuals tend to invest in it, especially in times of stock market crisis.

Provides security against inflation

As mentioned above, the prices of gold tend to appreciate a significant deal over time, on account of its reliability and minimal chances of displaying erratic movements. The rates of appreciation of gold tends to supersede the prevailing inflation rates of the particular country. Thus, by investing in gold, individuals could end up profiting a great deal, and thus establishing a hedge against inflation.

Long term investment 

Under usual circumstances, gold bonds are usually disbursed after a holding period of eight years. Thus, this scheme could be a blessing a disguise for individuals who desire to invest for a long period of time and gaining healthy profits.

Limitations of Gold Bonds

An inverse relationship with the stock market

The prices of gold do not usually tend to fluctuate or display erratic movements. On account of its reliability, it turns a significant boon in times of stock market crisis or inflation. However, during an upheaval of the stock market, the demand for gold experiences a downfall. During an economic boom, investors expect their companies to cope with the surging aggregate demand level and provide them with handsome returns on their investments. Thus, not many people go about purchasing gold bonds.

Dependency on fluctuations in currency

Another drawback of purchasing gold bonds is that the prices at which gold is traded incur significant fluctuations, with the fluctuations in the currency of the country. 

Taxation Rules

The returns on the investment in gold bonds could be classified as follows:

  • The profits gained upon the maturity of a gold bond.
  • The profits distributed to the investors on a half-yearly basis.

The individuals who have invested in the gold bond for its entirety are not mandated to pay long-term capital gains tax. However, periodic income is charged under the heading of ‘income from other sources’. The rates of income are determined on the basis of the income tax slabs, as set up by the central government.

Investors could also sell off their securities in the secondary market, at the prevailing market rate of gold. However, in such cases when an individual goes about the resale of a gold bond in the secondary market, he would be taxed for any profits realized. In cases when the individual resells the gold bond within the first three years, he obtains short term capital on the overall profits, at rates determined through the annual income of the investors. In other cases, when there is long term capital gains, the investors are taxed at the rate of 20% of the total profits. 

Why should one consider investing in sovereign gold bonds?

Gold has been a household name since time immemorial. Owing to its reputability, its demand never really goes out of the frame. Moreover, the prices of gold do not fluctuate frequently, and thus the investor is assured of healthy gains. Investment in a sovereign gold bond is invaluable for an individual who possesses a low aptitude for risk and desires long term investment with healthy profits. This scheme is certainly one of the highest ever return-bearing schemes issued by the central government. 

By purchasing sovereign gold bonds, an individual secures himself from frequent fluctuations and other stock market risks. Owing to the reliability of gold, gold bond purchases help in the accumulation of wealth in times of crisis, such as stock market breakdown or inflation, wherein the costs of regular products attain towering heights.

Comparing a sovereign gold bond to regular gold investment, the former certainly seems way more reliable and profitably, for it is backed by the highest political authority, i.e., the central government. 

Conclusion

Regardless of its merits, a sovereign gold bond must be purchased only after taking into account the demands and conditions of the investors. Investments in sovereign gold bonds are best suited for individuals who are not susceptible to many risks, and are financially ready for long term investment. Gold bonds also possess their share of risks. For instance, with reference to its dependency on the country’s currency, a variation in the US dollar would make room for steep downhill in the trade of gold, on account of the higher inflation rates.

A substantial increase in the import expenditures of a country would invite a downfall in the overall investment of a country, thereby reducing the demand for gold. Additionally, individuals interested in the purchase of sovereign gold bonds need to keep themselves updated through the RBI website, in order to acquire successful subscriptions and healthy returns. 

References


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