Fourth tranche of Sovereign Gold Bonds will be issued from July 18, 2016 till July 22, 2016. The issue price is Rs 3,119 per bond (per 1 gm of gold).
I have done a few posts on Sovereign Gold Bonds. In this post, I will focus on the specifics on this issuance and a few developments that have taken place since the last issuance in March, 2016.
Issuance Price of Earlier Tranches
The issue price is higher since the gold prices have run up since the last November. Issuance price is the simple average of price of gold of 999 purity for the previous week (July 11-July 15, 2016) as published by Indian Bullion and Jewellers Association (IBJA).
Read: Sovereign Gold Bonds (First Tranche, Second Tranche, Third Tranche)
Maturity/Exit Options
The Sovereign Gold Bonds mature in 8 years. However, there is an option to redeem your investments after 5 years on interest payment dates (twice a year).
Capital Gains Tax on Redemption/Sale in secondary market
There shall be no capital gains tax on redemption of these bonds. This is to bring taxation of Sovereign Gold Bonds in line with physical gold.
You can hold physical gold for say 20 years without capital gains tax liability. However, Sovereign Gold Bonds have to be redeemed after 8 years. This redemption may have given rise to capital gains tax liability.
In order to bring taxation at par with physical gold, the Government removed capital gains tax on redemption of Sovereign Gold Bonds in Union Budget 2016 (by amendment to Section 47 of the Income Tax Act)
However, the exemption is only for redemption (selling back to Government).
Sale in the secondary market (stock exchanges) may give rise to capital gains tax liability. Of course, there has to be capital gain first.
Short term capital gains will be taxed at your marginal income tax rate.
Long term capital gains will be taxed at 20% less indexation.
Capital gains taxation of Sovereign Gold Bonds is now at par with physical gold.
Other important features
- Minimum Subscription Limit has been revised from 2 grams to 1 gram (1 bond).
- Maximum investment limit is 500 gm of gold per financial year.
- Interest income of 2.75% p.a. is taxed at marginal income tax rate.
- In case of joint investment, the investment limit will be applied to first applicant only.
- Your investment will be redeemed at prevailing price of gold. You will not get back physical gold.
- Sovereign Gold Bonds are backed by Government guarantee. Hence, there is no price risk.
- The bonds will be listed on BSE and NSE. Hence, you can exit before maturity in secondary market too.
- You can take loans against these gold bonds (just like physical gold and jewellery)
Recent Development (Listing in BSE and NSE)
First tranche of Sovereign Gold Bonds issued in November, 2015 has now been listed on NSE and BSE. The bonds started trading on June 13, 2016.
Bonds issued in second and third tranches are yet to be listed.
The bonds (first tranche) listed at a heavy premium. The reason was that the gold prices had run up since the issuance in November, 2015. Moreover, since there is an interest element in Gold bonds, that aspect also had to be priced in by traders.
On the flip side, the average daily volume in the last 30 days was only 156 bonds. Quite low.
Low volumes also lead to high bid-ask spread (1-2% in case of gold bonds), which could eat into your returns if you want to sell. I saw bid-ask spread as high as Rs 50 a few times.
Many reasons can be attributed to it. Bonds markets in India do not see much trading in general.
Secondly, in the first tranche, the subscription was quite low (only Rs 329 crores). Quite possible that trading volumes for other tranches are higher.
Liquidity in Sovereign Gold Bonds can be low.
Where Sovereign Gold Bonds fares better?
There are many forms of investment in gold viz. physical gold, jewellery, Gold ETFs Gold Mutual Fund and Sovereign Gold Bonds.
No other form of gold investment (except Sovereign Gold Bond) offers interest income.
There is no management charge as in Gold ETF and Gold MFs. You do not have to incur making charges as in case of jewellery.
There is little risk of theft as in physical gold.
PersonalFinancePlan Take
Even though Sovereign Gold Bonds score over other investments in many areas, you still need to consider the end use before deciding to invest:
- You can wear Sovereign Gold bonds around your neck. You need gold jewellery for the purpose. Moreover, if you sell gold bonds in secondary market to purchase jewellery, it may give rise to capital gains tax liability.
- Liquidity is still suspect in gold bonds. If you are looking as a short term gains, Gold MFs and Gold ETFs may be a better option.
- If you are saving for your kid’s marriage after 15-20 years, you can look at systematic investments equity funds. You can gradually shift your investments to physical gold as you move closer to goal. However, investing in gold bonds for this purpose is still acceptable to me.
If you are looking to invest in Gold Bonds to diversify your portfolio, I think Gold Bonds are the best fit. You get interest of 2.75% per annum too. There is no capital gains tax liability either on redemption. Gold can act as good inflation hedge and can provide good protection in times of sharp currency depreciation. You can have 5-10% of your total investment portfolio in gold.
Invest in Sovereign Gold bonds if you want to diversify your portfolio.
I do not have any view on Gold prices. Hence, I cannot comment if this is the right time to invest in gold or gold bonds.
Additional Links
Finance Ministry Advertisement for 4th tranche of Sovereign Gold Bonds
15 thoughts on “Fourth tranche of Sovereign Gold Bonds: Should you invest?”
I can think of going for it: if post-8 yr flexibility is provided in extending my redemption date, in-case Gold slips into negative territory in relative to purchase date !
Say, post 8 yrs from now, Gold is trading in negative territory; say 28000 / 10 gms.
Then instead of booking loss, I would prefer to extend my redemption; Can this extension be done ?
If yes, then can it be done for any time frame ??
..as my preference would be to wait at-least till Gold revives into positive return territory from today’s date i.e. purchase date.
Hi Sarnendu,
I don’t have any view on gold prices. To be honest, I do not have the expertise.
Gold is an speculative asset. I look at it only from the perspective of diversification.
Coming to your question, there is no option to extend beyond 8 years.
After 8 years, you can invest in an upcoming issue at the time or you can purchase from secondary market.
Btw, why this aversion to book losses?
And don’t forget the interest part. In absolute terms, you might still have made money.
If there is no flexibility in extending the redemption period beyond 8yrs; then I am exposed to fall in Gold price as compared to today’s date.
If I redeem it before 5 yrs, then I am required to do it through secondary market; thus exposed to capital gain tax.
Thus need to time the redemption between 5 to 8 yrs to fight big price fluctuation which can take its price to negative territory compared to today’s date; .. & reap zero capital gain tax as well.
Then only it can be said to be probably little advantageous over gold etf considering add-on interest benefit offered with the bond.
You are exposed to price risk. Does not matter whether you can book losses or not.
Flexibility to extend redemption beyond 5-8 yr narrow time-frame equips me to handle this price risk in far better way;
This flexibility with Gold ETF makes it score over Sovereign Gold bond even with all other drawbacks associated with ETFs.
How?
By increasing my Holding period beyond 5-8 yrs narrow redemption time-frame, till the Cycle revives;
in-case Gold enters into negative cycle during this time-frame.
This I can do with Gold ETF, as it don’t have any exit compulsion w.r.t. any time-frame.
Sarnendu,
You can always use redemption proceeds to re-invest in gold bonds or even ETF at the prevailing price.
Hence, there is little difference.
Sir,
Another excellent read sir, as always spot on in your reasoning. I follow your financial advice to the tea, and tell many people about it too.
My question: I bought 20 grams in the second tranch issued on 8th Feb 2016, when would it be possible to change the name on the certificate as I want to put it in my sons name.
Thanks Chris!!!
I appreciate the kind words.
You can do it right away.
https://www.rbi.org.in/Scripts/FAQView.aspx?Id=109 (Search for gift)
Btw, why do you want to do it?
Will be unnecessary work if your son is a minor.
Hi Very Nice Article..For a person who wants to start investing (considering as of now till date he has not invested in any investment tool) ..What do you suggest ?
Should he invest directly in Equity (Shares) or Like in such bond where it seems safe due to gov & RBI involvement..Is it possible to answer in next one hour since today is last day of the Bond offer ?
Thanks Raja.
As I mentioned, gold is merely for diversification. It is not a smart decision to keep your entire invest in gold.
Moreover, sovereign guarantee has a different connotation when it comes to gold bonds. The guarantee is that the government will return the gold price prevailing at the time of maturity. That does not mean that you cannnot make a loss. If the gold price subsides in the coming 8 years, you will make a loss.
If you are a new investor, pick up a diversified portfolio.
Pick up equity mutual funds (instead of direct equity). Pick up a few debt products (such as FD, debt MF, PPF etc).
If you need professional assistance, suggest you visit offerings section on my website.
http://www.personalfinanceplan.in/our-offerings/
Good luck!!!
Thanks a lot..Will Certainly do that
The SGB shall be repayable on the expiration of eight years from the date of the issue and premature redemption is permitted after fifth, sixth and seventh years from the date of issue of SGB.
Right, Gavin.
Premature redemption on interest payment dates after 5th year.