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Should you invest in Sovereign Gold Bonds’ second tranche?

LiveMint logoLiveMint 11-07-2017 Ashwini Kumar Sharma

The second tranche of Sovereign Gold Bonds (SGB) 2017-18, issued by the Reserve Bank of India on behalf of Government of India, is currently open for subscription. The applications for the scheme will be accepted between 10 and 14 July 2017. The SGB scheme was introduced in 2015, as an alternative to investing in physical gold. Let’s understand why it is the best option.

The minimum investment requirement is 1 gram and you can invest up to 500 grams per financial year. So, if you have invested in the first tranche for FY18, factor that in while investing this time. The nominal value of the bond would be based on the simple average closing price—published by the India Bullion and Jewellers Association Ltd (IBJA) for gold of 999 purity—in the week preceding the subscription period. The final issue price shall be Rs50 per gram less than the nominal value.

Apart from price appreciation, in line with that of physical gold, the bond also offers an interest payout of 2.5% per annum on the amount of initial investment, which will be paid out half yearly. The issue date for this series of bonds is 28 July and its tenure is 8 years. You can withdraw prematurely after 5 years but only on two days in a year; the dates when the interest is paid out.

The redemption price will be based on the previous week’s simple average closing gold price for 999 purity, as published by the IBJA. This means, you will get the available market value of gold at the time of redemption.

When it comes to paper investments in gold, till a couple of years ago the option were exchange traded funds (ETFs). Investing in physical gold also invites making and transaction costs. While these may be low for bullion or coins, for jewellery it can be as high as 30%. And with the application of Goods and Service Tax (GST), cost of investing in physical gold has increased further. “The buyer of gold bars, coins and jewellery will also have to pay a GST of 3%. Before GST, the maximum taxation was up to 2.5%,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP, Chartered Accountants.

While the SGB scheme and gold ETFs are linked to the price of physical gold, SGB also gives an assured interest on top of the investment. And ETF investments entail an annual cost. Moreover, while gains—short- or long-term—from selling physical gold attract capital gain tax, the gains arising from redemption of SGBs—for individuals—is exempted from income tax.

However, most financial planners believe that though SGB is the best way to invest in gold, one should restrict gold to 10% of the portfolio and keep it for the occasions such as wedding in the house.

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