What are Sovereign Gold Bonds?
Introduction to Sovereign Gold Bonds:
Sovereign gold bonds, which are required by the RBI and are certificates issued against grams of gold, let people invest in gold without having to worry about storing their physical assets. Given that gold prices are less prone to market swings, sovereign gold bonds serve as a safe investment vehicle for private investors. These assets' prices have a tendency to increase dramatically over time due to the broad desire for gold, making them a highly promising investment option.
A certain window for subscription is pre-set for these bonds because the RBI is the issuer under the Government of India stocks. During this window, a sovereign gold bond plan is issued in the name of investors in tranches.
Every two to three months, the RBI typically announces the issuing of new sovereign bonds in a press release, with a one-week window for people to subscribe to this programme.
An investor receives a holding certificate in their name after successfully purchasing a sovereign gold bond.
Features of Sovereign Gold Bonds:
Updated Price:
Prices for sovereign gold bonds 2020 are determined by taking the simple average of the last three days' closing gold prices for 999 purity set by the Indian Bullion and Jewellers Association Limited (IBJA).
Periodic interest pay-outs:
The sovereign gold bond program comes with a 2.5% annual interest rate that is paid to investors every six months.
Fixed Tenure:
Gold bonds are issued for a period of 8 years, with premature withdrawal permissible from the 5th year. Also, individuals can sell their respective securities in the secondary market at the market rate of gold.
Premature withdrawal:
After a required holding term of 5 years, investors who want to withdraw their money may do so. This payment advantage is exercisable for the bonds' fifth, sixth, and seventh years of tenure, and it will be processed on the days when interest is paid out.
Resale:
Upon publication of a notification by the RBI, the Sovereign gold bond plan 2020 may be exchanged in the secondary market after 14 days from the first subscription date. The prices at which these bonds are traded are based on the gold price that is in effect on the specified date as well as the related supply and demand in the stock market. As a result, a holding certificate needs to be digitalized and kept in an investor's Demat account in order to be used for stock market transactions.
Quantity of Subscription:
Grams of gold should be used as the subscription amount instead of sovereign bonds. One must make a minimum investment equal to the cost of one gramme of gold, while the
For both individuals and Hindu Undivided Families (HUF), the upper limit is equal to the price of 4 kilograms of gold. The maximum weight for corporations and trusts is 20 kg.
When a sovereign bond matures, distributions are issued in accordance with the current gold price, which is determined by taking a simple average of the price of gold over the previous three days and announced by the IBJA. Because gold prices tend to increase significantly over time, people can enjoy significant wealth building with little risk exposure.
Advantages:
Low Risk:
In compliance with the Government Security Act of 2006, the Reserve Bank of India issues a sovereign gold bond on behalf of the national government. Sovereign gold bonds are among the safest investment options in India due to the government's backing, therefore there is no danger of repayment default. The price volatility of gold can be linked to market changes, which are the source of any risk associated with such investments.
Convenience:
The central government introduced sovereign gold bonds in November 2015 as part of the gold monetisation programme. Such government bonds were primarily intended to lessen the inconveniences associated with gold investments, as bullions and other physical forms of investments needed to be stored properly and securely.
A holding certificate is given to investors who buy a gold bond as a statement of their investment, serving as evidence of the same. To further increase the security of their investment, people can elect to digitalize these holding certificates and use them in their Demat accounts.
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Capital Appreciation:
Given that the price of this precious metal tends to increase over the long term, sovereign gold bond returns are significant. Investors sometimes turn to gold during periods of stock market upheaval because it has the potential to hold its value even when large functioning companies do poorly.
Due to its broad use, gold is one of the most in-demand precious metals, therefore demand is often high regardless of market fluctuations and world economic conditions. The intrinsic value of gold fluctuates less frequently as a result of unsystematic risks, which allows investment portfolios to multiply over time.
Long term Investment:
The holding duration for the 2020 sovereign gold bond programme is 8 years. This is the best option for people searching for a long-term investment strategy that produces significant capital gains and the security of a corpus.
Loan facility:
Bonds issued by sovereign governments are recognised as suitable collateral for loans. According to the RBI's LTV standards, any scheduled financial institution may lend up to 75% of the market value of such bonds.
Limitations:
Inversely related to the stock market:
As a result of the inverse relationship between gold prices and stock market returns, each increase in stock market returns is typically followed by a decline in gold prices. Investors approach the stock market with optimism during an economic boom because they anticipate that businesses will do well in response to the rising level of aggregate demand. As a result, there is a decline in interest in gold bonds, which lowers market prices.
As a result, the price of gold tends to be lower during an economic expansion.
Susceptible to Currency fluctuations:
The price at which gold is traded typically changes when currency values change. Gold prices decline when the US dollar, the standard currency, appreciates because of higher inflation rates. A nation's total investment level declines as its import costs grow noticeably, which has an impact on the demand for gold and its price.
Taxation rules:
The profits on sovereign gold bonds can be divided into two categories: interest payments made every two years and capital gains realised upon bond maturity. Long-term capital gains tax is not due by investors who hold a bond for the whole duration. Periodical interest income, however, is taxed under the category of "Income from other sources" and is subject to tax rates determined by the relevant income tax slabs set by the federal government.
Any capital gains earned by anyone who chooses to resell bonds on the secondary market are subject to taxation. Reselling before three years are up results in short-term capital gains on the overall earnings, calculated according to the investors' yearly income. On the other hand, long-term capital gains are subject to tax at a rate of 20% of total profits, following indexation.
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