Sovereign Gold Bond Scheme (SGBS)
Sovereign Gold Bond Scheme (SGBS) is one of the three gold related schemes launched by the PM in November 2015. It gives the people to invest their gold into sovereign bonds. Bonds are one of the three assets, the other being stocks and cash. A bond is a contractual agreement, where the issuer of the bond agrees to pay the face value of the bond against the loaned funds by the investor upon its maturity while a fixed rate of interest is being continually paid to the investor.
How it works?
In the same way in SGBS, a sovereign bond will be issued by the RBI on behalf of the government against the gold that the investor would loan. Rather than buying actual gold, the investor would have to pay the price in gold denominators like 1 gm gold, 2gm gold and so on. During this time, the gold will be rented out to gold vendors at higher rates of interest to make the gold flow in the economy, while the investor would continue to receive the rate of interest annually and the face value of gold upon maturity.
- The bonds will be issued in weight denominators of gold from 1 gram onwards upto 500 grams
- One is free to choose the amount to be invested making it flexible
- According to latest rollout 2017, the annual interest rates are 2.75%.
- It can be held in paper or demat form
- Purity of gold is assured as it is issued by the government
- The bonds are tradeable which means that an investor can transfer the bond to other investor if he meets the necessary requirements
- Even when the taxes have to be imposed according to the IT act, upon redemption of an SGB, the arising capital gain tax have been exempted
- There is no need for safety of storage as gold is not physically given by the investor. Also it has the legitimate backing of the government so the risks involved are minimum.
- It has a maturity period of 8 years
- Pre-mature withdrawal is allowed after 5 years.
Gold forms the second largest of India’s exports after oil. Despite having a big repository of gold in the country, it suffers a trade deficit. To reduce the deficit, the scheme was launched. It was aimed at luring out the gold from the houses and temples of India so that it could flow in the economy instead of being a dead money.
The scheme has great potential which benefits the three stakeholders in the process. The investor is ensured of the security of his gold unlike when it was lying in the home or lockers. Also he earns in the process, an annual rate of interest and the actual multiplied value later, unlike earlier when it used to be a dead money. The gold vendor would not have to import so much gold at high prices and could easily loan from the banks. The government benefits as the gold that was kept locked gets recycled in the economy generating money. Also, it might help generating enough gold so that the imports are reduced and trade deficit of the country decreases.