Stock / Share Market
by 5paisa Research Team Last Updated: 2022-06-07T14:39:05+05:30

Introduction

The current government in India has issued sovereign gold bonds to curb the demand for gold and bring down the current account deficit.

According to the World Gold Council, India's consumption of gold could rise to 600 tonnes towards the end of 2021.

The government is offering a 10 per cent premium on the prevailing price of gold when the bond is issued. The bonds will be available at branches of State Bank of India, Union Bank of India, HDFC Bank Ltd., ICICI Bank Ltd. and Axis Bank Ltd. for a minimum investment of Rs 500 and a maximum investment of Rs 500 million.

Sovereign Gold Bond Dates

 

Here are the important dates for the Sovereign Gold Bonds in India:

 

Sr.No.

Tranche

Date of Subscription

Date of Issuance

1.

2021-22 Series VII

October 25 - 29, 2021

November 02, 2021

2.

2021-22 Series VIII

November 29- December 03, 2021

December 07, 2021

3.

2021-22 Series IX

January 10-14, 2022

January 18, 2022

4.

2021-22 Series X

February 28- March 04, 2022

March 08, 2022

 

Source: Reserve Bank of India

 

What are Sovereign Gold Bonds (SGB)?

Sovereign Gold Bonds are a scheme launched by the government of India to tap into the considerable gold savings held by Indian households and boost investment in physical gold.

They can be used as collateral for loans from banks and other financial institutions but may not be exchanged for gold at banks or other designated agencies.

The demand for gold in the Indian market has seen a distinct 47% in the third quarter of 2021.  Middle-class people typically invest in gold as it is considered a hedge against inflation, social/political uncertainties and provides an easy way to store wealth.

Sovereign Gold Bonds will give the option to investors to earn interest on their investment instead of just holding physical gold, which makes nothing.

The Union Government of India has introduced the Sovereign Gold Bonds (SGB) scheme to reduce its indebtedness through additional non-debt creating capital receipts.

Insights of Sovereign Gold Bonds

The SGBs are available for sale at face value of ₹ 2,000 each in multiples of ₹ 100. The bonds are issued in a dematerialised (electronic) form on a first-come-first-served basis to individuals resident in India. They will be listed on the Reserve Bank of India's (RBI's) website and can be encashed by their holders after one year from their date of issue.

The bonds are issued for eight years, bearing interest at the rate of 2-3 per cent per annum payable half-yearly, which is redeemable after seven years. The Government of India will arrange to buy back the bonds at face value within three years from the date of maturity, subject to certain conditions.

Launch of Sovereign Gold Bonds

Sovereign Gold Bonds in India were introduced to boost the demand for precious metals.

India, in particular, is facing a problem in respect of its Gold Trade Balance. The Reserve Bank of India (RBI) has announced that individuals and companies could import gold through designated banks for personal use.

This would apply only to jewellery, electronics, aviation and solar applications; imports for other purposes would be permitted only through the RBI open general license (OGL).

The decision came into effect on 1 November 2015. The purchase limit set by the RBI is 100 grams per person per month; there is no restriction on holding gold bars or coins for investment purposes; however, these purchases will not be eligible for deposit in an Individual Retirement Account (IRA). But the RBI has made it clear that individuals can import even 100 grams through banks under the OGL route.

The objective of Sovereign Gold Bonds- Knowing the Fundamentals

The government of India decided to introduce Sovereign Gold Bonds (SGB) in the country. The objective behind introducing this product is to diversify individuals' investment portfolios in India, especially among women and senior citizens.

There are two kinds of SGBs—one for residents and the other for non-residents. Under the scheme, the bonds will be issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams in gold. These bonds would be available in the form of book-entry only.

No deduction under Section 80C is available for investing in SGBs. However, a deduction up to Rs 1 lakh is available under Section 80CCD(1b) for investment in gold coins or bars or both by an individual resident in India under a savings scheme notified by the government.

The minimum lock-in period for SGBs is five years, while there is no lock-in period for gold jewellery purchased with these bonds after three years. Therefore, one can redeem it after three years without any tax implications.

Sovereign Gold Bonds- Issue size, allocation details 

The scheme is open to individual investors and HUFs (Hindu Undivided Families). However, NRIs (Non-Resident Indians) and entities registered abroad are not eligible for the scheme.

 Sovereign Gold Bonds are available in 2 grams, 5 grams, 10 grams and 50 grams. You can buy these bonds either online or at designated banks and post offices. It is not mandatory to purchase these bonds in cash; you can also buy them through cheques or demand drafts.

The interest rate on these bonds is fixed at 2% for all denominations. This rate will be fixed until your bond remains active, and after this, you will get market-linked rates of interest as listed by the RBI (Reserve Bank of India).

There is no limit on the number of bonds you can buy, and each bond has a maturity period. These bonds can be purchased through banks, designated post offices or issued directly to individuals by the RBI. 

The bonds will be listed on the stock exchange and can be traded like any other government security. Banks, insurance companies and NBFCs will receive interest at the end of every quarter and the fiscal year, based on the average price of gold for that quarter/year. 

Wrapping Up

The primary objective of issuing these bonds is to reduce the burden of high deficits that the government is facing. The government feels that it can raise funds from investors through such Gold bonds for their deficit financing. This way, the government hopes to save foreign exchange reserves, as they will not need to borrow from international markets.

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