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Sovereign Gold Bonds
Similar to RBI 7.75 % bonds that we have learned earlier, sovereign gold bonds (SGBs) are also issued by the RBI. The only difference is that investors' earnings are linked with the return of gold. Also this bond scheme provides gold like returns along with some interest. This scheme has been launched by the Government of India. It was launched in tranches. The first tranche was offered in November 2015, second tranche in January 2016, third tranche in October 2017.
Gold bonds are issued by the RBI on behalf of the Government. Under this scheme, gold bonds are issued in multiples of 1 gram. The main objective of SGB is to encourage people to hold gold in electronic form rather than in physical form. This would eliminate the risk and cost of storage.
Gold bonds are held in demat form. One needs to buy a minimum of 1 gram of gold. Maximum of 4 KG of gold can be subscribed by an individual in a financial year. One needs to hold this bond for eight years. Exit options are available from the fifth year on the stock exchange. These bonds are transferable.
How to buy Sovereign Gold Bonds
These bonds can be bought from banks, post offices and Stock Holding Corporation of India. One needs to provide identity documents and get the bond issued thereafter.
Interest Rate Mechanism
The interest rate is 2.5% payable semi-annually on the initial value of the investment. But this interest rate can vary from particular issue to issue.
Tax Implications
The gains from redemption of this bond are exempted from tax if sold after completing full tenure of 8 years. If the bond is sold before completing 8 years then the seller has to pay capital gains tax.
Risk associated with Sovereign Gold Bonds
There is no risk involved on the part of interest payouts as these bonds are backed by the Government of India. Capital protection is however not guaranteed as the price of this bond is linked to real gold prices. If inflation turns out to be higher than the nominal interest rate of the Bond, there would be no real returns available. Hence, it is not inflation protected.
