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RBI Gold Bond

19th December, 2022

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Context

  • The Reserve Bank of India (RBI) has announced the Sovereign Gold Bond Scheme 2022-23 – Series III, which will be open for subscription during December 19-23, 2022.

What is Sovereign Gold Bond (SGB)? Who is the issuer?

  • SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India. The Sovereign Gold Bond Scheme (SGBS) was launched in 2015.

Benefits of Sovereign Gold Bonds

  • The quantity of gold for which the investor pays is protected, since he receives the ongoing market price at the time of redemption/ premature redemption. The SGB offers a superior alternative to holding gold in physical form.
  • The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturityand periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form eliminating risk of loss of scrip etc.

Are there any risks in investing in SGBs?

  • There may be a risk of capital loss if the market price of gold declines.However, the investor does not lose in terms of the units of gold which he has paid for.

Who is eligible to invest in the SGBs?

  • Persons resident in India as defined under Foreign Exchange Management Act, 1999are eligible to invest in SGB. Eligible investors include individuals, HUFs, trusts, universities and charitable institutions. 

Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

Whether joint holding will be allowed?

  • Yes, joint holding is allowed.                      

Can a Minor invest in SGB?

  • The application on behalf of the minor has to be made by his/her guardian

What are the Know-Your-Customer (KYC) norms?

  • Every application must be accompanied by the ‘PAN Number’ issued by the Income Tax Department to the investor(s).

Can an investor hold more than one investor ID for subscribing to the Sovereign Gold Bond?

  • An investor can have only one unique investor Id linked to any of the prescribed identification documents. The unique investor ID is to be used for all the subsequent investments in the scheme. For holding securities in dematerialized form, quoting of PAN in the application form is mandatory

What is the minimum and maximum limit for investment?

  • The Bonds are issued in denominations of one gram of gold and in multiples
  • Minimum investmentin the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).
  • In case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market. The ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions

Can each member of my family buy 4Kg in their own name?

  • Yes, each family member can buy the bonds in his/her own name if they satisfy the eligibility criteria.

Can an investor/trust buy 4 Kg/20 Kg worth of SGB every year

  • An investor/trust can buy 4 Kg/20 Kg worth of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis.

Is the maximum limit of 4 Kg applicable in case of joint holding?

  • The maximum limit will be applicable to the first applicant in case of a joint holding for that specific application.

What is the rate of interest and how will the interest be paid?

  • The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment. Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

Who are the authorized agencies selling the SGBs?

Bonds are sold through offices or branches of Nationalised Banks, Scheduled Private Banks, Scheduled Foreign Banks, designated Post Offices, Stock Holding Corporation of India Ltd. (SHCIL) and the authorised stock exchanges either directly or through their agents.

At what price the bonds are sold?

  • The nominal value of Gold Bonds shall be in Indian Rupees fixed 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 business days of the week preceding the subscription period.

What will one get on redemption?

  • On maturity, the Gold Bonds shall be redeemed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

Can one encash the bond anytime one wants? Is premature redemption allowed?

  • Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates.The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor 

Can one gift the bonds to a relative or friend on some occasion

  • The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria. The Bonds shall be transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer which is available with the issuing agents.

Can one use these securities as collateral for loans?

  • Yes, these securities are eligible to be used as collateral for loans from banks, financial Institutions and Non-Banking Financial Companies (NBFC). The Loan to Value ratio will be the same as applicable to ordinary gold loan prescribed by RBI from time to time. Granting loan against SGBs would be subject to decision of the bank/financing agency, and cannot be inferred as a matter of right.

What are the tax implications on i) interest and ii) capital gain?

  • 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 terms capital gains arising to any person on transfer of bond. Relief from Capital Gains Tax is only for individual investors (Section 47 of Income Tax Act) 

Is tax deducted at source (TDS) applicable on the bond?

  • TDS is not applicable on the bond.However, it is the responsibility of the bond holder to comply with the tax laws.

Who will provide other customer services to the investors after issuance of the bonds?

  • The issuing banks/SHCIL offices/Post Offices/Designated stock exchanges/agents through which these securities have been purchased will provide other customer services such as change of address, early redemption, nomination, grievance redressal, transfer applications etc.

Whether nomination facility is available for these investments?

  • Yes, nomination facility is available as per the provisions of the Government Securities Act 2006 and Government Securities Regulations, 2007. An individual Non - resident Indian may get the security transferred in his name on account of his being a nominee of a deceased investor provided that:
  • the Non-Resident investor shall need to hold the security till early redemption or till maturity; and
  • the interest and maturity proceeds of the investment shall not be repatriable.

Can one get the bonds in demat form?

  • The bonds can be held in demat account. A specific request for the same must be made in the application form itself.
  • Till the process of dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to demat will also be available subsequent to allotment of the bond.

Can one trade these bonds?

  • The bonds are tradable from a date to be notified by RBI.(It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006. Partial transfer of bonds is also possible.

What is the procedure to be followed in the eventuality of death of an investor?

  • The nominee/nominees to the bond may approach the respective Receiving Office with their claim. The claim of the nominee/nominees will be recognized in terms of the provision of the Government Securities Act, 2006 read with Chapter III of Government Securities Regulation, 2007. In the absence of nomination, claim of the executors or administrators of the deceased holder or claim of the holder of the succession certificate (issued under Part X of Indian Succession Act) may be submitted to the Receiving Offices/Depository. It may be noted that the above provisions are applicable in the case of a deceased minor investoralso. The title of the bond in such cases too will pass to the person fulfilling the criteria laid down in Government Securities Act, 2006 and not necessarily to the Natural Guardian.

Can one get part repayment of these bonds at the time of exercising put option?

  • Yes, part holdings can be redeemed in multiples of one gm.

How to buy Sovereign Gold Bonds (SGBs)?

  • There are 2 ways.
  • Primary Market (directly from RBI): RBI comes out with new issues on a regular basis (almost on a monthly basis). You can apply through your bank, your broker, or websites such as StockHolding Corporation of India.
  • Secondary Market: Gold bonds are listed on stock exchanges. If you have a demat and trading account, you can purchase from the secondary market too. For more on nuances and misconceptions of buying/selling gold bonds in the secondary market, please refer to this post.

Advantages of Sovereign Gold Bonds

Absolute Safety

  • Sovereign Gold Bonds have none of the risks that are associated with physical gold, except the market risks. There are no hefty designing or wasting charges here. Moreover, SGBs earn interest, unlike physical gold which is an idle investment.

Extra Income

  • You can earn a guaranteed annual interest at the rate of 2.50% (on the issue price), this is the most recent fixed rate.

Indexation Benefit

  • Long term capital gains arising when investors transfer bonds qualify for indexation benefits. There is also a sovereign guarantee on the principal as well as on the interest earned.

Tradability

  • One can trade gold sovereign bonds on stock exchanges within a specific date (at the discretion of the issuer). For instance, after completing five years of investment, one can trade them on the National Stock Exchange or Bombay Stock Exchange, among others.

Loans

  • Loans can be availed from these gold bonds and can be used as collateral for loans. The Loan to Value ratio will same as applicable to physical gold loan which is regulated by the RBI.

Limitations of Sovereign Gold Bond

Susceptible to Currency Fluctuation

  • Any fluctuation in currency values tend s to have an impact on the price at which gold is traded. Appreciation of US dollars, the benchmark currency, causes gold prices to falter due to higher inflation rates. As the import expenses of the country rise significantly, the total investment level of a country falls, consequently affecting the demand for gold and its prices.

Loss of capital

  • As the value of the bond is closely connected to the price of gold on the international markets, your investment in SGB may result in a capital loss on one’s initial investment if the price of gold comes down to the price of gold one bought the bond.

Inversely related to the Stock Market

  • Gold prices have an inverse correlation with the stock market, ehrein any upturn in stock market returns is generally followed by reduced gold prices.

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