SOVEREIGN GOLD BONDS

Subject: Economy

Context: Recently, the Reserve Bank of India (RBI) has announced a plan to sell sovereign gold bonds (SGBs) in six phases.

Concept:

Sovereign Gold Bond Scheme

It is to be issued by Reserve Bank of India on behalf of the Government of India.
The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.
The tenor of the Bond will be for a period of 8 years with exit option after 5th year to be exercised on the next interest payment dates.
The Gold Bonds will be issued as Government of India Stock under GS Act, 2006.
The investors will be compensated at a fixed rate of 2.50 percent per annum payable semi-annually on the nominal value.

Significance of SGB’s

The investors gain from appreciation in gold prices as redemption of bonds will be based on the then prevailing prices.
If gold prices treble after eight years, the investor will get the higher prices plus the 2.5% interest.
The investor does not lose in terms of the units of gold which he has paid for if gold prices fall.
On maturity, the gold bonds will be redeemed in Indian rupees and the redemption price will be based on a simple average of closing price of gold of 999 purity of the previous 3 business days from the date of repayment.
Although the tenure of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year, on coupon payment dates.
The bond will be tradable on exchanges, if held indemat form and it can also be transferred to any other eligible investor.
They can be used as collateral for loans from banks, financial Institutions and non-banking financial companies (NBFC).

Tax implications of Sovereign Gold Bond

The interest on the bonds will be taxable as per the provisions of the Income-Tax Act, 1961 (43 of 1961).
The capital gains tax arising on redemption of SGB to an individual has been exempted.
The indexation benefits will be provided to long-term capital gains arising to any person on transfer of bonds.
TDS is not applicable on the bonds, but it is the responsibility of the holder to comply with tax laws.