The Reserve Bank Of India will soon be issuing Sovereign Gold Bonds on behalf of the Government of India.
How They Work
Investing in Sovereign Gold Bonds is similar to investing in physical gold. Investors receive returns that are linked to the market price of gold.
The bonds are issued on payment of Rupees and are denoted in grams of gold. Investments can be as small as two grams or even as large as 500 grams per fiscal year.
These bonds will be available from designated post offices and individual commercial banks. When applying for a Sovereign Gold Bond, the potential investor includes a bank account. This account will be credited all profits from the bond.
The bonds can be purchased through cash, cheques, demand drafts, and electronic fund transfers. They are paid upon maturity in direct payment credited to the bank account provided.
Sovereign Gold Bonds earn interest at the rate of 2.75 percent per year on the amount of initial investment. They will be available in both paper and demat forms.
Exiting The Investment
Though the tenor of Sovereign Gold Bonds is eight years, it is possible to exit the investment early. There are a few ways to do this:
● Trading the demat form of bond on the Exchange
● On the 5th, 6th, and 7th years there is the option of coupon payment dates.
● Approach the bank or post office purchased from within thirty days of the coupon payment date.
● Must be done at least one day before the coupon payment date.
Once early redemption has been completed, proceeds will be credited to the bank account provided when applying for the bond.
Better Than Gold?
Investing in physical gold can come with issues and risks. These problems are removed when investing in Sovereign Gold Bonds.
Sovereign Gold Bonds eliminate the risk and cost involved with storing gold. These bonds also remove the issue of purity level involved in gold jewelry investments.
Using Sovereign Gold Bonds In Other Ways
Sovereign Gold Bonds can also be used as collateral when applying for loans. The loan to value rate for Sovereign Gold Bonds would be the same as it is for gold loans.
The Sovereign Guarantee
Sovereign Gold Bonds carry a Sovereign Guarantee on both the capital invested and on the interest obtained.
The quantity of the investment is protected since payment when redeemed at the market price per gram.
Secure Records Prevent Loss
With Sovereign Gold Bonds, there is no risk of losing the bond. The files of the bonds are held in the books of the Reserve Bank of India.
When the bond is one month from maturing, a notice is sent to the investor. On the day it matures the proceeds are credited to the bank account on record.
Tax Exemptions
The capital gains tax on the profits from redeeming a Sovereign Gold Bond has been exempted. This exemption will transfer to the new holder if the bond is traded or transferred.
The only risk of Sovereign Gold Bonds is one attached to any investment based on gold. The risk that the market price of gold will drop.
