Govt Likely to Discontinue Sovereign Gold Bond Scheme: Here's Why?

The government is likely to discontinue sovereign gold bonds as it is an “expensive and complex” instrument, according to a CNBC-TV18 report citing government sources. Introduced in 2015 as a measure to curb the rising import of gold, SGBs represent a form of gold investment on paper.

Since their inception, investors have poured Rs 72,274 crore into 67 tranches of SGBs issued by the Reserve Bank of India (RBI) on behalf of the government. Of these, four tranches have fully matured, with investors having received their returns.

Notably, early investors in the first four tranches issued between 2015 and 2017 more than doubled their money, with the payouts coming from the government exchequer.

However, the financial obligation associated with these bonds has significantly increased for the government. According to the latest budget documents, the government now owes investors Rs 85,000 crore, a nearly ninefold increase from less than Rs 10,000 crore at the end of March 2020.

Even before an official announcement, the market seems prepared. The demand for sovereign gold bonds has seen a sharp rise in the secondary markets. People were paying as much as 8 per cent more than the reference price set by the government as of August 14.

What Are Sovereign Gold Bonds?

Sovereign gold bonds are government securities denominated in grams of gold. They substitute for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The SGBs are issued by the RBI on behalf of the government.

Sovereign Gold Bonds: Know Key Features

Eligibility: Only resident individuals, Hindu Undivided Family (HUF), trusts, universities and charitable institutions can buy sovereign gold bonds.

Denominations: The bonds are denominated in multiples of gram(s) of gold with a basic unit of one gram.

Tenure: There is a holding period of eight years of SGBs with an option of premature redemption after 5th year to be exercised on the date on which interest is payable.

Minimum and Maximum Limit for Buyers: A person can buy a minimum of 1 gram of gold in SGBs, while the maximum limit is 4 kg for individuals, 4 kg for HUF, and 20 kg for trusts and similar entities per fiscal year (April-March). In the case of a joint holder, the investment limit of 4 kg will be applied to the first applicant only.

Redemption Price: The redemption price will be in Indian rupees based on a simple average of the closing price of gold of 999 purity, of the previous three working days published by IBJA Ltd.

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

KYC Norms: Know-your-customer norms will be the same as that for the purchase of physical gold.

Collateral: The SGBs can be used as collateral for loans.

Tax Treatment: The interest on SGBs shall be taxable as per the provision of the Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual is exempted. The indexation benefits will be provided to long-term capital gains arising to any person on transfer of the SGB.

Tradability: SGBs shall be eligible for trading.