Investing in gold is something that Indians generally prefer. However, holding gold physically leads to hoarding of gold and a balance of payments crisis because of gold imports. The Government has introduced schemes to allow people to invest in gold without actually physically holding gold in their possession. This can either be done through holding a gold exchange traded fund which mimics the movement of gold prices. Another scheme that people can invest in is the Sovereign Gold Bond scheme. This scheme is administered by the Reserve Bank of India. This means the RBI issues these bonds on behalf of the Government of India.
How does the SGB scheme work?
Sovereign Gold Bond is like investing in gold. The investor holds electronic gold. An application for SGB can be made both online and offline. It can be made online through the investor’s banks or offline by authorized banks, post office, foreign banks, scheduled commercial banks, Stock Holding Corporation of India Ltd. Etc. There is no minimum subscription for these type of corporate bonds which means that if the investor meets the criteria, then allotment will be made. Once the allotment is made, the holding certificate will be posted to the investor or the holding certificate can be received on email if the details are updated in the application.
Each individual and Hindu Undivided Family is allowed to hold up to 4kgs of gold denominated SGB. An individual can invest in his own name or jointly. The SGB scheme allows for nomination facility. However, this limit is 20kg for trusts and other similar organizations notified by the Government. The holding limit for Sovereign Gold Bond is per year. This means an individual can invest up to 4kgs in the scheme every time it opens for subscription. The Sovereign Gold bond is sold at the current market price for 999 purity gold in the market before the issue opens. This issue is open for a limited period of time during which application can be made.
The scheme sells grams of gold at current market prices for the investor to invest in. When the Sovereign Gold Bond matures, it will redeem at the market prices. This means the investor will get the current market price of gold at the time of redemption. Any capital gain on maturity is exempt from capital gains tax. Apart from that, the investor gets interest at 2.5% per annum. However, this interest is taxable.
The Sovereign Gold bonds can be held in demat form as well as certificate form. It is possible to convert physical certificates into demat form by making a request with the RBI since these Sovereign Gold bonds are in the RBI books.
Investment in Sovereign Gold Bond can be done by giving cash or by investing online through net banking. For individuals applying in the SGB scheme online, there is a discount of Rs. 50 per gram. To invest in the scheme, the investor’s PAN card works as the Know Your Customer (KYC).
It is not necessary to wait till maturity to exit from these corporate bonds. Even though the maturity period is 8 years, an early exit opportunity is available from the completion of 5 years.