Sovereign Gold Bonds – Series I – FY 2016-17 – July 2016 Issue

by Shiv Kukreja on July 18, 2016

in Uncategorized

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

After three unsuccessful attempts of raising any meaningful amount of money from the investors by issuing its gold bonds, the government is launching its fourth tranche of Sovereign Gold Bonds (SGBs) from today onwards i.e. July 18, 2016. This will be the first such issue in the current financial year and that is why it has been notified as Series I of FY 2016-17. The issue will remain open for five days from today to close on July 22.

To make it more attractive, the government and the RBI have made certain changes this time around. Below is the table having salient features of these bonds, some of which are different from its previous issues.

Salient Features of Sovereign Gold Bonds – Series I of FY 2016-17

Picture1

Issue Price – Price for this tranche has been fixed at Rs. 3,119 per gram of gold, which is substantially higher than the price of these bonds in the previous three issues. Issue price for the first tranche was fixed at Rs. 2,684 per gram of gold, that of the second tranche was Rs. 2,600 per gram of gold and it was Rs. 2,916 per gram of gold in the third tranche.

The government could raise only Rs. 246 crore from its first issue in November issuing bonds with around 916 kg of gold, Rs. 798 crore from the second issue in January with around 3,071 kg gold and Rs. 329 crore from the third issue in March with around 1,128 kg gold.

Issue Price Methodology – The issue price of Rs. 3,119 per gram of gold has been fixed on the basis of simple average of the closing prices of gold with 999 purity of the previous week (July 11, 2016 to July 15, 2016) published by the India Bullion and Jewellers Association Ltd. (IBJA).

Coupon Rate @ 2.75% p.a. –  As in earlier tranches, coupon rate has been fixed at 2.75% p.a. payable semi-annually i.e. twice in a year. As mentioned earlier as well, these bonds offer two streams of return – one in the form of regular interest income @ 2.75% and the other in the form of increase or decrease in the market price of gold. A decline in their price would result in a negative yield from capital gains point of view, but 2.75% p.a. interest would remain fixed throughout its tenor of 8 years.

Allotment Date & Tenor of Investment – These bonds would get allotted on 5th of August and carry a maturity period of 8 years from the allotment date. However, the investors can ask for redemption of their bond holdings from the 5th year onwards. This option will be available for the investors in the 5th, 6th and 7th year of investment only on the interest payment dates.

Demat Option Available Now – In its previous issues, you were allowed to apply for these bonds in physical form only. But, in order to cut the allotment/listing time, the government has allowed to introduce the demat option as well. Now, you can get these bonds allotted directly into your damat account.

Tradability & Exit Option Before 5 years – These bonds are redeemable back to the RBI, but only from 5th year onwards. But, what to do if I want my money back in an emergency? So, in that case, you can sell these bonds on the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) where they will get listed for trading after allotment.

However, previous issues of these bonds have faced a considerable delay in the allotment and listing of these bonds. Redressal mechanism of your grievances is also considerably poor. So, if you apply for these bonds now, you might again be required to have a lot of patience in getting them allotted and see their listing in a timely manner.

Online Bidding Platforms Launched – BSE and NSE have also launched their respective online bidding platforms for these gold bonds. With these platforms in place, applying for these bonds should become easier now. These bidding platforms will remain open for all 24 hours in a day for the next 5 days to close on July 22 at 12 midnight time. There will be a cooling off period of 30 minutes from 5:30 p.m. to 6 p.m.

Premature Redemption – In case of premature redemption (after 5 years), investors can approach the concerned intermediary 30 days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned intermediary at least one day before the coupon payment date. Redemption proceeds will be credited to the customer’s bank account.

Taxation in case of Redemption/Sale – Finance Minister Arun Jaitley in his budget speech had proposed to make these bonds tax exempt if redeemed after 5 years. These bonds also enjoy indexation benefits if sold after 3 years from the allotment date. As per the Budget speech “It is proposed to provide that redemption by an individual of Sovereign Gold Bond issued by Reserve Bank of India under Sovereign Gold Bond Scheme, 2015 shall not be charged to capital gains tax. It is also proposed to provide that long terms capital gains arising to any person on transfer of Sovereign Gold Bond shall be eligible for indexation benefits”.

So, as an individual, whenever you redeem these gold bonds after holding them for 5 years, you are not liable to pay capital gains tax. Indexation benefit will also result in a substantial tax saving.

Interest @ 2.75% is Taxable – Interest income earned every year @ 2.75% p.a. is taxable and the investors will have to show it as an Income from Other Sources in their income tax returns (ITRs).

Minimum and Maximum Investment – Investors are required to buy a minimum of 1 units of these bonds i.e. 1 gram of gold or a minimum investment of Rs. 3,119. In the previous issues, you were required to buy a minimum of 2 units of these bonds. On the other hand, you can buy a maximum of 500 units of these bonds or 500 grams of gold, which works out to be Rs. 15,59,500.

NRI/QFI Investment Not Allowed – Non-Resident Indians (NRIs) and Qualified Foreign Investors (QFIs) are not eligible to invest in these bonds. Only Resident Indian Entities, including individuals, trusts, universities and charitable institutions are eligible to invest in these bonds.

Transferability – Though these bonds are tradable, trading is allowed only once it is notified by the Reserve Bank of India (RBI). Bonds can be transferred also by execution of an Instrument of Transfer, in accordance with the provisions of the Government Securities Act.

Collateral for Loans – If required, these bonds can be used as collateral for seeking loans from various lending institutions.

Sovereign Gold Bonds vs. Gold ETF vs. Physical Gold – A Comparative Chart

Picture1

When I compare these bonds with Gold ETFs or physical gold, I am not able to find any point which goes against these bonds, except liquidity. As you can check from the table above, almost all the points of comparison are in favour of these bonds.

Should you invest in Sovereign Gold Bonds – Series I, FY 2016-17?

An uncertain global economic environment amid Brexit concerns, China slowdown, weak US jobs data and upcoming presidential elections in the US has pushed up the prices of gold in the last six months or so. But, whether this jump in gold prices will be able to sustain itself or is it a good time to sell your gold holdings and preserve your profits? These are million dollar questions to be answered with a high degree of accuracy.

Though I am bearish on gold prices and carry a view that these are not the best of the times to invest in gold, investors with a bullish view and a medium to long-term investment horizon can consider investing in these bonds. This way of investing in gold is cheap, tax efficient, risk-free in terms of a credit default and do provide you a stream of regular cash flows. If your portfolio has some scope of gold investment, I think these bonds are the best way to invest in gold.

Leave a Comment

Previous post:

Next post: