In order to curb the demand for physical gold and curtail excessive dependence on gold imports, the Ministry of Finance has issued draft guidelines on Sovereign Gold Bond Scheme (SGBS). Just like Gold ETFs, this scheme too will enable investors to hold gold units in paper form.
In his Budget speech, Arun Jaitley had said, "India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetized. I propose to develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the bond."
Features
Only Indian residents can buy these bonds. SGBS will be issued in denominations of 2,5,10 grams of gold. Also, an individual can not buy more than 500 grams of gold bonds per year. This translates to a maximum investment of Rs.13.32 lakh a year at today’s cost (Price of 10gm of gold is Rs.26,635 as on June 23, 2015).
SGBS will have a maturity period 5-7 years. The government has proposed that the yield on these bonds be linked to the international rate for gold borrowing. An indicative lower limit on such borrowing rates is 2% per annum. That means, investors will get an indicative return of 2% per annum along with the mark-to-market loss or gain.
Like physical gold, investors can use these bonds as collateral for loans. In order to provide liquidity, the government has proposed to list these bonds on commodity exchange platforms.
Taxation
SGBS will be treated as physical gold for taxation. That means, if an investor sells these bonds through an exchange within 3 years, the gains, if any, will be taxed at marginal rate of taxation. Similarly, long term capital gains arising out of sale of bonds after 3 years will be taxed at 10% or 20% with indexation.
Distribution
RBI will sell these bonds through banks, post offices, NBFCs and brokers/agents. Distributors will get 0.5% as commission to sell this scheme.
Government intends to issue 50 tons of such bonds to raise around Rs.13,500 crore in the current financial year.
Hemant Rustagi of Wiseinvest Advisors is of the view that SGBS may give tough competition to gold ETFs. “On paper, sovereign gold bonds look superior to gold ETFs. Firstly, there will be no expense ratio in SGBS which means there will not be any tracking error like in the case of Gold ETFs. Also, these bonds will offer a minimum yield of 2% which is over and above mark-to-market value of gold. This will offer higher returns to investors. The only grey area in such bonds is liquidity. Gold ETFs provide adequate liquidity to investors.”
Suresh Sadagopan of Ladder7 Financial Advisories seconds the view and said that gold ETFs are likely to lose sheen. “The sovereign bonds are certainly more attractive as they offer 2% return above the mark-to-market gain/loss. Also, liquidity may not be an issue because the bonds will be listed on commodity exchanges. Gold ETFs and gold funds will certainly lose sheen.”
The government has invited comments on this draft guideline till July 2, 2015.
