Sovereign Gold Bonds Scheme: Is it a worthwhile alternative to traditional business investments?

Last Updated at: Nov 04, 2019
Sovereign Gold Bonds Scheme

On January 11, 2019, the Government announced the opening of the Sovereign Gold Bonds 2018-19 (Series V) Scheme that will be open for investment from January 14, 2019, to January 18, 2019. In this post, we cast light at what Gold Bonds are and whether you should consider them as an investment alternative to traditional routes of investment like equity, mutual funds or bonds.

Details of the Sovereign Gold Bonds (Series V) Scheme 2019

    • The Issue Price of the Bond during this subscription period has been kept at Rs. 3214 per gram with the Settlement Date of January 22, 2019, as also published by RBI.
    • In order to promote digital payment via the online mode, the Government of India in consultation with the Reserve Bank of India has decided to allow a discount of Rs. 50 per gram from the issue price to those investors who apply online and the payment is made through digital mode. For such investors, the issue price of Gold Bond comes out to be Rs.3164 per gram of gold.

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What are Sovereign Gold Bonds?

Sovereign Gold Bonds are government security against gold, where units are denominated per every gram of gold. We know that the popularity of gold in our country is unmatched, with households investing substantial savings in buying gold coins, jewellery or bullion. However, what separates this scheme from a regular jewellery purchase is the annual interest earning component. Since these are backed by the government, there is greater security of payout.

Let us look at some dynamics of the Sovereign Gold Bonds Scheme:

  • Elimination of risk, cost of storage and the making charges on jewellery: On a personal level, one may prefer to buy jewellery or gold coins for their ornamental use or for gifting. However, from a business perspective, it is important to minimise risks. Since gold in physical form can be lost or stolen, it requires greater care and costs directed towards its security. Investment in Gold Bonds gives one the access to the same denomination of gold, which is held in demat form by the Reserve Bank of India. One also saves out on the ambiguities involved in making charges, the risk purity and exchange losses.
  • Redemption based on prevailing gold rates: Since the value of gold is likely to keep appreciating, there is a greater chance of earning on this investment, as the bonds when surrendered, are eligible for repayment on the current gold rate. This rate is determined as an average of the closing prices of the previous three days. Thus, the investment adds up in value with its interest earning and the profit on its redemption.
  • Interest Payment: Under this Scheme, the government pays its investors an interest rate of 2.5 per cent, which is paid semi-annually. While this may be a low rate compared to other alternatives like fixed-deposits or mutual funds, there is an advantage in taxation on redemption and greater security of payment, since these are government-backed securities.
  • Tax Exemption: While there is no TDS in this case, the interest component is taxable in the hands of the investors. If the bonds are held till their maturity period of eight years, the capital gains may be exempted. Moreover, indexation benefit that reduces the overall long-term capital gain is available.
  • Transferability and Joint Holding Allowed: These bonds can be easily transferred to another person. There is also scope for a joint holding of the bonds as an investment.
  • Collateral value: While some lending institutions may not have the option of accepting gold jewellery in physical form, the bonds under the Sovereign Gold Scheme are perfectly valid for being used as collateral against loans.

Some of the concerns that weigh against investing in a Sovereign Gold Bond Scheme are relatively low-interest payouts, the volatility of return since the redemption is subject to the gold rate prevailing at a future date and the lock-in period of five years. However, if you’re looking for multiple baskets to put your eggs in, this could be one of the safer, more standard forms of investment with a fixed yearly return and the possibility of a greater peak in value, Sovereign Gold Bonds can prove to be worthwhile.

Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.