The Government of India, in consultation with the Reserve Bank of India, has decided to issue Sovereign Gold Bonds. The Sovereign Gold Bonds will be issued in six tranches from October 2020 to March 2021.

The Bonds will be sold through Scheduled Commercial banks (except Small Finance Banks and Payment Banks), Stock Holding Corporation of India Limited (SHCIL), designated post offices, and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange Limited.

Salient Features

    1. Product Name: Sovereign Gold Bond 2020-21

    2. Issuance: To be issued by Reserve Bank of India on behalf of the Government of India.

    3. Eligibility: The Bonds will be restricted for sale to resident individuals, HUFs, Trusts, Universities and Charitable Institutions.

    4. Denomination: The Bonds will be denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

    5. Tenor: The tenor of the Bond will be for a period of 8 years with exit option after5thyear to be exercised on the next interest payment dates.

    6. Minimum size: Minimum permissible investment will be 1 gram of gold.

    7. Maximum limit: The maximum limit of subscription shall be 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal (April-March) notified by the Government from time to time. A self-declaration to this effect will be obtained. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the Secondary Market.

    8. Joint holder: In case of joint holding, the investment limit of 4 KG will be applied to the first applicant only.

    9. Issue price: Price of Bond will be fixed in Indian Rupees on the basis of simple average of closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited for the last 3 working days of the week preceding the subscription period. The issue price of the Gold Bonds will be `50 per gram less for those who subscribe online and pay through digital mode.

    10. Payment option: Payment for the Bonds will be through cash payment (up to a maximum of `20,000) or demand draft or cheque or electronic banking.

    11. Issuance form: The Gold Bonds will be issued as Government of India Stock under GS Act, 2006. The investors will be issued a Holding Certificate for the same. The Bonds are eligible for conversion into demat form.

    12. Redemption price: The redemption price will be in Indian Rupees based on simple average of closing price of gold of 999 purity, of previous 3 working days published by IBJA Ltd.

    13. Sales channel: Bonds will be sold through Commercial banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices (as may be notified) and recognised stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange, either directly or through agents.

    14. Interest rate: The investors will be compensated at a fixed rate of 2.50 percent per annum payable semi-annually on the nominal value.

    15. Collateral: Bonds can be used as collateral for loans. The loan-to-value (LTV) ratio is to be set equal to ordinary gold loan mandated by the Reserve Bank from time to time.

    16. KYC documentation: Know-your-customer (KYC) norms will be the same as that for purchase of physical gold. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport will be required. Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to individuals and other entities.

    17. Tax treatment: The interest on Gold Bonds shall be taxable as per the provision of 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 bond.

    18. Tradability: Bonds will be tradable on stock exchanges.

    19. SLR eligibility: Bonds acquired by the banks through the process of invoking lien/hypothecation/pledge alone, shall be counted towards Statutory Liquidity Ratio.

    20. Commission: Commission for distribution of the bond shall be paid at the rate of 1% of the total subscription received by the receiving offices and receiving offices shall share at least 50% of the commission so received with the agents or sub agents for the business procured through them.

About SGBs

Sovereign Gold Bonds (SGBs) are a kind of Government bonds that are issued (by the RBI on behalf of the Government) on payment of rupees but denominated in grams of gold. The value of these bonds is tied to the value of gold. On redemption, the investor gets interest income and the prevailing price of gold.

These bonds are thus, different from usual Government securities (G-secs) as the redemption value at the time of maturity is not a fixed sum, but linked to the price of an underlying commodity called gold. However, like G-secs, SGBs are also backed by a sovereign guarantee.

For example, if an investor invests in a 10 gram SGB, at the price of say Rs 2,500 per gram, then he is entitled to an yearly interest income at a certain ‘x’ percentage, plus on maturity, he will get the then prevailing price of gold (which may not necessarily be Rs 2,500 per gram).

Gold Monetization Scheme focuses on those individuals who have gold available with them and intend to encash it for realizing its monetary value. On the other hand, sovereign gold bonds scheme targets those individuals who intend to purchase gold, for investment purpose.

Background

India is one of the largest consumers of gold in the world and imports as much as 800-1000 tons of gold each year. It is estimated that roughly around 30 per cent of the import of gold in the country, on a yearly basis, is to meet the demand for gold for purely investment purpose. The demand for gold for investment purpose is due to the returns and ease that the metal provides vis-à-vis other investment instruments. Given these benefits, the demand for gold for ‘investment purpose’ can be shifted away from physical gold, only if an alternate financial instrument for investment, which is linked to price movements of gold is made available. The newly introduced Sovereign Gold Bonds scheme aims at achieving this objective.

(The author is a trainer for Civil Services aspirants. The views expressed here are personal.)