Sovereign gold bonds are now more lucrative
NEWDELHI: The Cabinet approved a few changes in Sovereign Gold Bond (SGB) scheme last week to make it more attractive to investors. A look at the changes.
SGB SCHEME
The scheme was launched in 2015 with an aim to curb demand for physical gold, by replacing it with alternative investment options in the form of paper or electronic investments. The intention was to mobilise finances and reduce the economic strain caused by imports of physical gold and narrow the current account deficit. Under the scheme, investors were offered bonds, where each bond was equivalent to 1 gram of gold. The minimum investment was kept at 2 gram (reduced to 1 gram in the subsequent issue), with a maximum limit of subscription of 500 gram per person per fiscal year. Price of the bonds has to be fixed in Indian rupees on the basis of the previous week’s (Monday-Friday) simple average closing price for gold of .999 purity, published by the India Bullion and Jewellers Association Ltd.
In the initial issues, SGB was offering 2.75% of interest per annum over and above the increase in price of gold. In subsequent issues, interest rate on SGB was brought down to 2.5% per annum.
The additional benefit was provided with a target to mobilise ₹15,000 crore in 2015-16 and ₹10,000 crore in 2016-17 under the scheme. However, the amount so far raised by it is ₹4,769 crore.
THE CHANGES
Now individuals and Hindu Undivided Families (HUFs) will be able to buy 4 kg of gold under the scheme, whereas a Trust will be able to buy up to 20 kg of gold in a fiscal. Besides increasing the investment limit, the government plans to introduce variants of SGBs with different interest rates and risk protection or payoffs, to serve different categories of investors. The ministry, after consultation with the NSE, BSE, banks and Department of Post; is also planning to make SGBs available ‘on tap’, which means it may be offered throughout the year.
CONCLUSION
Transaction charges in physical gold like jewellery can go as high as 25-30%, whereas in case of bars and gold coins, it can be as high as 13-15%. Even in case of ETFs, expense ratio can vary between 0.9% and 1.1% per annum. But in case of SGB, not only the transaction cost is negligible, it also provides additional interest of 2.5% per annum, which is free of income tax.