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Issues in Sovereign Gold Bond

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November 24, 2023

Why in news?

People prefer physical gold over sovereign gold bonds as no trail is left for the tax authorities.

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What is Sovereign Gold Bond (SGB)?

About

A financial instrument introduced by  government to reduce gold imports

Launch year

2016

Issuer

Reserve Bank of India (RBI) on behalf of Government of India

Interest

2.5% paid semi-annually

Eligible investors

  • Persons residing in India as defined under Foreign Exchange Management Act,1999
  • Individuals, Hindu Undivided Families (HUFs), Trusts, Universities and Charitable institutions

Investment limit

  • Minimum investment- 1 gram
  • Maximum investment
    • Individuals & HUFs - 4 kg
    • Trusts - 20 kg

Authorized agencies to sell SGBs

  • Nationalised Banks
  • Scheduled Private Banks
  • Scheduled Foreign Banks
  • Designated Post Offices
  • Stock Holding Corporation of India Ltd.,
  • Authorised stock exchanges

Tenure

8 years with exit option after the 5th year

What are the advantages of SGB?

  • Protected investment- The quantity of gold the investor pays for is protected, since he receives the ongoing market price at the time of redemption/premature redemption.
  • Cost effective- These bonds offer a superior alternative to physical gold as the risks and costs of storage are eliminated.
  • Passive income- Investors are assured of the market value at the time of maturity, and periodical interest.
  • Flexibility- These bonds are free from issues like jewellery making charges, purity, risk of loss of scrip, etc.,
  • Collateral- It is as liquid as physical gold and could be exchanged for money at the time of financial needs.
  • Tax benefits- There is a provision of tax exemption from the interest and capital gains of the bond.
  • Minimal risk- Gold bonds have a negligible risk factor, making them an ideal investment choice.

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What makes physical gold more attractive than SGB for people?

  • Liquidity restriction- SGBs are long-term investments that cannot be liquidated before 5 years from the date of investment whereas physical gold can be sold at anytime and anywhere.
  • Lower returns- SGB are risk free instruments but they provide low returns when compared to other market instruments.
  • Investment limit- Imposing maximum limit restricts the people their freedom of choice to invest.
  • Market fluctuation- It shifts the price of gold below the bond cost price.
  • Low demand- The demand for SGB is very low compared to physical gold imports.
    • Only 1.8% of total gold imports were equivalent to SGBs in the last 8 years.
  • Tangible asset- Confidentiality and privacy is not possible in SGB where the KYC (Know Your Customer) norms are applied and followed as they are issued by RBI through banks.
  • Cultural value- Physical gold holds emotional significance in India, especially for weddings and festivals. It is also seen as a symbol of status and wealth.
  • Dependence- SGB carries the risk of default or fluctuation due to government guarantee unlike the physical gold.

Quick facts

Electronic Gold Receipts

  • They are a new way of trading gold on the stock exchange without having to buy or store physical gold.
  • Aim- To provide transparent and efficient price discovery of gold.
  • Regulation- Securities and Exchange Board of India (SEBI)
  • They are held in demat accounts and traded in stock exchanges like dematerialised stocks.
  • The stock exchange can source physical gold from deposits in delivery centres, domestic refineries and imports.

 

References

  1. Business Line- India wants gold not gold bond
  2. RBI- FAQs on Sovereign gold bond
  3. Business Today | Image
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