The Budget 2016 has proposed to exempt Sovereign Gold Bond Scheme (SGBS) and Gold Monetization Scheme (GMS) from capital gains tax. Simply put, investors investing in these instruments will not be required to pay any short term or long term capital gains tax on redemption.
SGBS
In the budget document, the Finance Minister said, “It is proposed to provide that redemption by an individual of Sovereign Gold Bond issued by Reserve Bank of India under Sovereign Gold Bond Scheme, 2015 shall not be charged capital gains tax.”
The budget has also proposed that transfer of SGBS will be eligible for indexation benefits.
Currently, SGBS is treated as physical gold for taxation. That means, if an investor sells these bonds through an exchange within three years, the gains, if any, are taxed at the marginal rate of taxation. Similarly, long term capital gains arising out of sale of bonds after three years is taxed at 10%.
SBGS was launched in November to curb the demand for physical gold and curtail India’s excessive dependence on gold imports. The scheme has got a decent response. SGBS received 63,000 applications, mopping up close to Rs.250 crore for 917 kg of gold in its first issue.
Only Indian residents can buy these bonds. An individual cannot buy more than 500 grams of gold bonds per year. SGBS has a maturity period 5-7 years and the yield on these bonds is linked to the international rate for gold borrowing. An indicative lower limit on such borrowing rates is 2% per annum. This means that investors will get an indicative return of 2% per annum along with 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.
GMS
Similar to SGBS, the government has proposed to extend the capital gains tax exemption to GMS. GMS enables households and jewelers to keep their gold with the banks and earn interest on it.
The deposits under this scheme can be made for 1-3 years (with a roll out in multiples of one year); 5-7 years and a 12-15 years (as decided from time to time). The minimum quantity of gold one can deposit is 30 grams.
According to a RBI notification, banks are required to pay an annual interest of 2.25%-2.50% on medium (5-7 years) to long term (12-15 years) deposits in GMS.
Impact on Gold ETFs
GMS is a deposit scheme and hence cannot be strictly compared with Gold ETFs.
SGBS, on paper, looks superior to Gold ETF. 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.
However, entry and exit points are fixed by RBI. Investors can invest only when RBI issues such bonds. Also, these bonds come with a maturity of five and seven years.
Hemant Rustagi of Wiseinvest Advisors said that that Gold ETFs provide adequate liquidity to investors which is not the case with SGBS. “Considering the volatility in gold prices, investors can get benefits of rupee cost averaging by investing systematically in Gold ETFs. On the other hand, investors will have to invest and exit in pre-determined period in SGBS. Hence, there is a risk of mark to market loss in SGBS.”
Can IFAs sell SGBS?
RBI has sold these bonds through banks, post offices, NBFCs and brokers/agents. IFAs can also sell these bonds. Distributors get 0.5% as commission to sell this scheme.
