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).
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.
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.