Sovereign Gold Bond Scheme

The Sovereign Gold Bond Scheme is a government initiative in India that allows individuals to invest in gold in a paperless form. The Government of India introduced it as an alternative to physical gold investments and to reduce the demand for imported gold, which significantly impacts India's trade deficit. The Government of India has recently announced the Sovereign Gold Bond Scheme 2023-24, and the Reserve Bank of India has issued a notification providing key information about the scheme.

Sovereign Gold Bond Scheme

The Sovereign Gold Bond Scheme (SGB) is a government initiative in India that allows individuals to invest in gold in paper rather than physical gold. Under this scheme, RBI issues bonds for the Government of India denominated in gold grams. Investors can purchase these bonds during specified subscription periods and receive returns linked to the price of gold. The bonds have a maturity period of 8 years, with an exit option available from the 5th year onward. The interest rate offered on these bonds is fixed and payable semi-annually.

Purpose Sovereign Gold Bond Scheme 2023-24

The scheme encourages individuals to invest in gold as a financial asset rather than acquiring physical gold. It provides an opportunity to participate in the potential appreciation of gold prices while offering additional benefits.

Advantages of Investing in Sovereign Gold Bonds

Investing in Sovereign Gold Bonds (SGBs) offers several compelling reasons:

Assured returns of 2.5% p.a. payable half-yearly: Investors receive a fixed annual return of 2.5% on the nominal value of the bonds. This return is paid out semi-annually, providing a predictable income stream.
No storage hassles like physical gold: Unlike physical gold, there is no need to worry about storage when investing in SGBs. This eliminates security concerns associated with holding physical gold.
No Capital Gain Tax on Redemption: SGBs offer the advantage of exemption from Capital Gain Tax upon redemption. This can help maximize returns for investors.
Liquidity: SGBs can be easily traded on stock exchanges within two weeks of issuance, as the Reserve Bank of India (RBI) specified. This scheme provides investors with the flexibility to exit their investments if needed.
Gold Bonds Can be used as collateral for loans: Gold Bonds can be used to secure loans. The loan-to-value (LTV) ratio is set in line with the RBI's guidelines for ordinary gold loans. Authorized banks mark the lien on the bonds in the depository.
No GST and making charges: SGBs are not subject to goods and services tax (GST), unlike gold coins and bars. Compared to digital gold, which incurs a 3% GST, investing in SGBs offers a tax advantage. Additionally, there are no making charges associated with SGBs.

Investing in SGBs provides a convenient and secure way to benefit from the price movement of gold while enjoying features like assured returns, liquidity, loan collateral, and tax benefits.

Prescribed Authority

The Reserve Bank of India (RBI) issued the Sovereign Gold Bonds on behalf of the Government of India. The bonds are issued in denominations of grams of gold, and the minimum investment requirement is set at one gram.

Who Can Invest?

Sovereign Gold Bonds (SGBs) are open for investment by resident individuals, Hindu Undivided Families (HUFs), and trusts. These bonds are available in denominations of one gram of gold and multiples thereof. The minimum investment requirement is one gram, while the maximum is 4 kg per individual. Furthermore, if you choose to sell your SGBs through the stock exchange, the price you receive will depend on the prevailing market price of gold, which the trading activity can influence during that period.

Subscription Dates

According to the notification released by the Reserve Bank of India (RBI) for the Sovereign Gold Bond Scheme 2023-24, the subscription dates for Series I and Series II are as follows:

Series I:

Subscription Period: June 19 to June 23, 2023
Issuance Date: June 27, 2023

Series II:

Subscription Period: September 11 to September 15, 2023
Issuance Date: September 20, 2023

During the specified subscription periods, interested individuals can apply for the respective series of Sovereign Gold Bonds. It's important to note that the subscription window is open for a limited time, and applications must be submitted within the designated period.

Sovereign Gold Bond 2023: Offering Price and Discount

The Indian government has set the offering price for the initial installment of the Sovereign Gold Bond Scheme 2023-24 at Rs.5 926 per gram of gold. This scheme, available for subscription over five days commencing on Monday, provides a discount of Rs.50 per gram to investors who apply online. Consequently, online investors can purchase a Gold Bond at an issue price of Rs.5 876 per gram of gold.

Interest Rate

You will be entitled to a fixed interest rate of 2.50% per year, which will be paid semi-annually based on the nominal value of your investment. It's important to note that this interest rate applies to the initial amount of money you invested and not the current value of the Bond at the time the interest is paid. The interest will be directly credited to the account you provided during the investment process.

Tenure of the Bond

The Bond will have a duration of 8 years, and starting from the 5th year, investors will have the option to exit on the interest payment dates. This means that from the 5th year onward, you can redeem the Bond on the 6th, 7th, or at its maturity in the 8th year. Before the 5th year, redemption is not possible. The Reserve Bank of India (RBI) or the depository will provide one month's notice to investors regarding the Bond's maturity date, ensuring that investors are informed well in advance.

Maturity Period

As mentioned above, Sovereign Gold Bonds (SGBs) have a maturity period of eight years. However, investors have the option to redeem them early after the completion of the fifth year. The redemption price of the bonds, whether upon maturity or early redemption, is determined based on the average closing price of gold with a 999 purity over the preceding three working days.

Sovereign Gold Bond: Investment Limit

When it comes to investing in Sovereign Gold Bonds (SGBs), there are specific limits set for the minimum and maximum permissible investments:

The minimum investment allowed is 1 gram of gold.
For individual investors, the maximum subscription limit is 4 kilograms of gold.
The maximum subscription limit for Hindu Undivided Families (HUF) is also 4 kilograms of gold.
Trusts and similar entities have a higher maximum subscription limit of 20 kilograms of gold.
These limits apply on a fiscal year basis, from April to March.

Payment Options

Bond payments can be made through cash up to a maximum of Rs. 20,000/-, demand drafts, cheques, or electronic banking. If payment is made through a cheque or demand draft, it should be made in favor of the designated receiving office.

Issuance Form

The Gold bonds are issued as Government of India Stock under the GS Act, 2006. Investors will receive a Holding Certificate for the bonds and are eligible for conversion into a Demat form.

Where to Purchase Sovereign Gold Bond Scheme 2023-24 Series I?

The bonds can be acquired directly or through authorized agents from different sources, recognized stock exchanges, and the Bombay Stock Exchange.

Loan against Bonds

The bonds can be used as collateral for obtaining loans. The Loan to Value ratio will follow the guidelines for ordinary gold loans set by the RBI. The authorized banks will mark a lien on the bonds in the depository. However, the decision to grant a loan against SGBs rests with the lending bank/institution and cannot be assumed as a guaranteed right by the SGB holder.

Liquidity of the Bonds

As mentioned earlier, from the 5th year onward, you can redeem the Bond in the 6th or 7th year. Alternatively, the Bond can be sold in the secondary market (stock exchange) after the RBI notifies the availability for sale. Therefore, you have two choices: Redeem the bond in the 6th or 7th year or sell it in the secondary market after the RBI announces its availability for sale. The redemption price of the bonds will be determined based on the simple average of the closing price of gold (999 purity) published by IBJA for the previous week, specifically from Monday to Friday.

Nomination

You can nominate or change the nominee using Forms D and E. For individual Non-Resident Indians (NRIs), the security can be transferred to their name if they are nominated as the beneficiary of a deceased investor. However, the NRIs must hold the security until early redemption or maturity, and the interest and maturity proceeds cannot be repatriated.

Transferability

The transfer of the Bonds can be facilitated by completing an Instrument of Transfer in accordance with Form 'F', as specified in the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007. These regulations were published in part 6, Section 4 of the Gazette of India on December 1, 2007.

Sovereign Gold Bond Scheme 2023-24 Series I Taxation

The taxation of the Sovereign Gold Bond Scheme 2023-24 Series I involve three aspects, which we will discuss individually.

Interest Income: The semi-annual interest income earned will be considered taxable income. For individuals in the 10%, 20%, or 30% tax bracket, the post-tax return would be 2.25%, 2%, and 1.75%, respectively. This income should be declared under the head of "Income from Other Sources," and taxes should be paid accordingly, similar to your Bank Fixed Deposits (FDs).
Redemption of Bond: As mentioned earlier, from the 5th year onwards, you can redeem the Bond in the 6th, 7th, or 8th year (last year). Let's assume you invested in the Bond for Rs. 2,500, and at the time of redemption, the bond price is Rs. 3,000. In this case, you would realize a profit of Rs. 500. The capital gain arising from redemption is exempt from Tax for individuals.
Selling in the Secondary Market of the Stock Exchange: Another aspect of taxation arises if you decide to sell the bonds in the secondary market before maturity. Let's assume you purchase the Sovereign Gold Bond Scheme 2023-24 Series I and sell it on the stock exchange after a year or so. Any profit or loss from such a transaction would be considered a capital gain.

Therefore, if these bonds are sold in the secondary market before maturity, there are two possibilities:

Selling within three years: If you sell the bonds within three years with a capital gain, it will be taxed according to your applicable tax slab.
Selling after three years: If you choose to sell the bonds after three years but before maturity, the capital gain will be subject to a tax rate of 20% with indexation.

No Tax Deducted at Source (TDS) concept exists for these bonds. It is the responsibility of the investors to pay taxes as per the rules mentioned above.