I have been quite vocal in my previous columns about my dislike for ‘investing’ in gold. However, the fact remains that we are, culturally, very attracted to the metal so if you must absolutely buy gold, why not consider the government issued Gold Sovereign Bonds instead?
The government has just issued Series IV of these bonds for which applications have been open since October and will continue to be open till December 2017. The subscription period for these bonds will be Monday to Wednesday of each week during the period, and the bonds so purchased will be settled on the Monday following the subscription period. In this column I will discuss these bonds and the pros and cons of investing in them.
What are government issued Gold Sovereign Bonds?
Gold Sovereign Bonds are government issued investments whose underlying asset is gold. It is exactly like buying gold, except you don’t own it physically, you own it in paper form/demat form. The value of these bonds will depend on the price of gold at the time of issue.
How much can I buy and at what price?
You can buy a minimum of one gram and a maximum of 4000 grams/4kg per person. The latest subscription for these bonds opened on November 13 and ends on the November 15, for which the price has been fixed at Rs 2961 per gram. If you apply online through the list of scheduled banks (like ICICI, HDFC, SBI etc) and pay online, you will get a discount of Rs. 50 per gram.
No locker space required!
Among the greatest advantages of buying Gold Sovereign Bonds is the fact that you don’t need to find locker space or pay heavy locker rent charges to store your ‘gold’. The gold that you buy is in demat form which means that it’s just like holding Mutual Fund units or shares in a company. You don’t have to worry about it getting lost or stolen either.
Is it a stable investment?
The fact is that gold prices will almost always increase in the long run because gold is a limited resource. However, given the market atmosphere and the sharp increase that gold prices have seen recently, there’s a good chance that gold prices will fall in the near future. Take the issue price for example - it is Rs 2961 per gram. Gold price (22k) on the other hand, is Rs 2817, which is a decrease. This isn’t to say that it won’t increase again, but to point out the fact that gold isn’t the most ‘stable’ of investments.
Interest @ 2.50%
The other advantage of investing in Gold Sovereign Bonds as opposed to physical gold is the fact that you earn an interest at 2.50% per annum. Physical gold is usually idle, so being able to get an additional income (apart from the actual increase in value) is a good thing. The interest that you earn, however, is not tax free.
Tax free gains
The tenure of each of these bonds is for 8 years, with an exit option after the fifth year. At the end of 8 years, the government will redeem the bonds at whatever gold rate is prevailing on that date. Let’s say that you buy these bonds at Rs. 2,900/- per gram and 8 years later the gold price per gram around the date of redemption is Rs. 5,000/-. Your gain of Rs 2,100 per gram is tax free.
However, capital gains on Gold Bonds are tax free if and only if you hold on to them for the full period of 8 years. If you sell them after 3 years but before 8 years, you will be eligible to pay Long Term Capital Gains tax at the rate of 20% and if you sell them before 3 years have been completed, you will have to pay Short Term Capital Gains tax at slab rates. So, hold on to them if you want to get maximum benefits.
Are Gold Sovereign Bonds for you?
If you have always wanted to ‘invest’ in gold, then Gold Sovereign Bonds are a good way to invest in them because they’re highly liquid (they’re traded in the BSE and NSE), government issued and therefore, safe, and they generate a second income as opposed to physical gold which just stays idle. Gold Sovereign Bonds are also a great way for women to enter formal investing. You will have to keep in mind though, that these bonds are subject to the volatilities in gold prices. Having said that, they are, without a shred of a doubt, a far better investment than physical gold, especially jewellery.
Rupee Rani is a weekly column on finance for women. Write to us with your queries at email@example.com.
Main image by Jeremy Schultz