Introduction:
Government securities denominated in grams of gold comes under sovereign gold bonds scheme. In this, the investor does not hold physically gold but he pays the issue price in cash and the investor is assured market value of gold at the time of maturity. The Reserve Bank of India issues this bond on behalf of the government of India. it is government pack securities which are linked to the price of gold.
Under the Foreign Exchange Management Act, 1999 a person residing in India is eligible to invest in SGB. The eligible investors can be individuals, trusts, universities, charitable institutions, etc. if the residential status of investor changes from resident to non-resident. Then he can still hold SGB till maturity or early redemption. In this joint holding is also allowed. The minor can also invest in Sovereign Gold Bond but the application on behalf of minor has to be made by his guardian.
The quantity of Gold is protected for which the investor pays as he receives the ongoing market price at the time of pre-mature or mature redemption. This is a very good alternative to hold gold in physical form with no risks and cost of storage. There is no issue of making charges and purity as it is seen when we go to buy gold physically in jewellery form, the gold bonds are either mentioned in the books of RBI or in Demat form, as a result, there is no risk of losing it. The only risk of capital lose is if the market price of gold declines but still investor does not lose the units of gold he had paid for.
Objective and Scope of the Act
Government of India after approval of the cabinet notified sovereign gold bond scheme on November 5, 2015. The main objective of the scheme is to develop a financial asset as an alternative method to purchase gold. It reduces the physical demand for gold and it shifts some amount of domestic saving for purchasing gold as financial savings.
The primary objective of the government to introduce the scheme of sovereign gold is to reduce import of gold which in turn helps to reduce a trade deficit as well as the current account deficit. We are the worlds one of the largest consumers of the gold. We consume almost 1000 tons of gold every year, most of it is imported. Gold is the second-largest expense on our import after oil. Last year the expenditure on imported gold was almost 35 billion dollars.
According to Government Security Act, 2006 a Sovereign Gold Bond is issued on behalf of the central government by the Reserve Bank of India. It is the safest form of investment if there is any risk it will be only due to market fluctuations in gold prices. The investors or issued a holding certificate on purchasing of the gold bond which is the declaration and also the proof of their investment.
The people used to go in for purchasing gold from jewellers to secure themselves. But on the introduction of Sovereign Gold Bonds, the investor not only owns the gold but also gets an interest on it. Government has fixed interest on 2.75% per annum on initial investment amount but there is no compounding of interest and the interest goes to his bank account half-yearly.
In the long term, there is a hike in the price of Gold so the return of Sovereign Gold Bond is substantial. At the time of disturbance in the stock market, investors prefer gold bond as it has the potential to hold its value. The individuals also enjoy the growth in the real value of the investment which allows them to accumulate wealth over time.
For availing loans, Sovereign Gold Bonds are an acceptable form of collateral. A maximum of 75% of the market value of Sovereign Gold Bonds can be availed as a loan from any financial institution as mentioned by RBI’s LTV Regulations.
The Gold Bonds Act,1993 provides some immunities provided to the subscribers of gold bonds. This act was enacted by Parliament in the 44th year of the Republic of India. The immunities are :
- No subscriber need to disclose the nature and source of acquisition of gold subscribed in the gold bonds.
- No enquiry or investigation will be done against any subscriber owing the gold bonds in respect to Wealth Tax Act,1957; The Gift Tax Act, 1958; The Income Tax Act, 1961; The Customs Act, 1962; The Foreign Exchange Regulation Act,1973 and The Foreign Contribution Act, 1976.
Limitations
There is an inverse relationship between gold prices and the stock market. When stock market returns is more then the gold price gets reduced. Whenever there is inflation in the economy then the approach of investor towards the stock market is the expectation of better performance by the companies. As a result, the demand for gold bonds decline which causes a decline in market prices. This means that when there is a boost in the business cycle, the gold prices lower.
The price at which gold is traded depends on the fluctuation in the currency value. The benchmark currency is the US dollar. If there is high inflation rates of the US dollar the gold prices falter. If countries import expenses increase the total investment level of the country falls. So, it affects the demand for gold and its prices.
The returns of the Sovereign Gold Bond are classified as :
- Capital gains which is earned on maturity of a bond.
- The interest earnings given semi annually.
It is not necessary for investors holding a bond for one full term to pay long term capital gains tax. The Central Government has established income tax slabs. If an individual wants to resale a bond in the secondary market he has to pay tax on capital gains realized. Resale before completing three years attracts short term capital gains on total profits and long term capital gains attract tax at 20% of total saving.
Exceptions and Important Provisions
The interest on gold bonds is taxable as per provision of Income Tax Act,1961.
As per section 5 of The Gold Bond (Immunities and exemptions)Act,1993 there are two cases in which gold bonds are not taken into account :
The provisions of Income Tax Act, 1961 will not apply to:
- Any interest acquired by the subscriber from gold bonds.
- Any long term capital gains arising to the subscriber
The provisions of Gift Tax Act, 1958 does not apply when the gift of gold bonds is made by a subscriber.
The Act as a Roadmap for the Future
The Sovereign Gold Bond Scheme offers the investor an alternative method to own gold. This method belongs to the debt fund category. This scheme has declined the physical demand for gold over the years. It tracks the import-export value of the assets and also there is transparency. The value of the bond is denominated in multiples of gold in grams. There is a significant increase in the investor. People who want to make an investment in gold should consider buying Sovereign Gold Bonds as it is a low-risk investment. The interest is deposited in the bank of the investor on half-yearly bases. The cost of purchasing or selling Sovereign Gold Bond is very less as compared to physical gold because, in physical gold which is in the form of jewellery, making charges, GST and taxes have to be paid. There is no problem of keeping the bonds as it is safe to store it in Demat form as nobody can steal a paper. For having good returns in long term investment, the Sovereign Gold Bonds are the best as there is no making charges, GST, taxes involved in it.
The benefits of Sovereign Gold Bond are :
- Elimination of risk and cost of storage.
- Redemption is linked to gold price.
- Attractive interest with appreciation opportunity of asset.
- Except from Capital Gain Tax if it is kept till maturity.
The most important features of Sovereign Gold Bond are that it is convenient to invest online, on investing in bonds holding certificate is issued and the tenure of the bond is 8 years but one can exist from 5th year.
Conclusion
The Sovereign Gold Bond is a bond which National Government issues with a promise of open payments (periodic interest payments) and also on maturity date to repay the face value. These bonds are denominated in the currency of the country itself. When the government is very close to default on its debt, the media uses the term Sovereign Debt Crisis. The government can sell bonds depending on how creditworthy the market considers gold bonds to be. The International Credit Rating Agencies Provide the ratings for the bond and it is left for the participants to make up their mind.
0 Comments