Global economy is heading into a recession. India’s gross domestic product (GDP) growth will be in negative territory in 2020-21 as the outbreak of coronavirus has disrupted economic activities. We expect an output loss of 6.0% to 8.0% of annual GDP and a higher fiscal deficit as tax collection should be lower.
India GDP Growth Slows to 3.1%!!!!
What Will India’s Economy Look Like When It Emerges From The Lockdown?
The sovereign gold bonds issue from the RBI offers a good opportunity for investors to acquire gold for their investment portfolios.
Strategically, an amount equivalent to 5% of the overall portfolio should be invested in gold.
Gold has been traditionally considered as a store of value or hedge against inflation. Recently we saw that the subscription of gold bonds in April 2020 touched a figure of Rs. 822 crore which is the highest subscription since October 2016 when the scheme was announced. There are several auspicious occasions like Akshay Tritiya where we saw a sudden increase in the demand for Gold. 1 unit of gold bonds is priced at Rs. 4,639 which is equal to 1 gram of gold. The subscription was open on 20th April 2020 and was closed on 24th April 2020. RBI has announced the subscription dates till September, the subsequent subscription will open on from 11th May 2020.
What is sovereign gold bond scheme 2020-21 series III?
Sovereign Gold Bonds are government securities denominated in grams of gold and are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank of India (RBI) on behalf of the Government of India. Sovereign Gold Bonds will be issued on payment of money and would be linked to the price of gold. Eligible investors include trusts, universities, charitable institutions, individuals, HUFs, etc. The Bonds are issued in denominations of one gram of gold and in multiples thereof.
A third instalment of the government-run Sovereign Gold Bond (SGB) scheme will open for subscription for five days starting Monday, June 8. The Sovereign Gold Bonds – issued by the Reserve Bank of India (RBI) on behalf of the government – are part of the central government’s market-borrowing programme. The issue price for the third tranche of the SGB 2020-21 scheme is Rs 4,677 per gram, the RBI said on Friday. The current series of government-run gold bonds – the Sovereign Gold Bond 2020-21 scheme – comes at a time when the rapid spread of the deadly coronavirus (COVID-19) has rattled the financial markets around the globe, but increased the appeal of the yellow metal as a safe-haven. The Sovereign Gold Bonds (SGBs) are government-run bonds – issued by the RBI – denominated in multiples of one gram of gold.
Who Can Buy Gold Bonds?
Resident individuals, Hindu Undivided Families (HUFs), trusts, universities and charitable institutions can invest in the SGB scheme.
How To Invest In Gold Bonds?
The SGBs are sold through commercial banks, the Stock Holding Corporation, designated post offices, and stock exchanges BSE and NSE. The bonds are held in RBI books or in Demat form.
Gold Bond Lock-In.
The gold bond scheme comes with a tenor of eight years, with an exit option after the fifth year. The option can be exercised on interest payment dates.
Gold Bond Issue Price.
The price is determined on the basis of a simple average of the closing price 999-purity gold published by the Mumbai-based India Bullion and Jewellers Association (IBJA) for the last three working days of the week preceding subscription. Online subscribers paying through the digital mode get a discount of Rs 50 on every gram of gold. The same method is used for determining the redemption price.
Gold Bond Tax Implication.
The interest on gold bonds is taxable. However, the capital gains arising out of redemption are exempted for individual investors.
Gold Bond Investment Limit
A minimum of one gram and a maximum of four kilograms of gold can be acquired by eligible individuals and HUFs in a financial year. Trusts and similar entities can purchase up to 20 kilograms in a financial year.
IMPORTANCE OF KEEPING GOLD BONDS IN THIS VOLATILE MARKET.
Risk of theft: Risk of theft is low as compared to physical gold.
Interest earned: The government has fixed 2.5% assured interest per annum on the issue price. The interest is paid half-yearly and the last instalment is payable on maturity along with the principal.
Taxation benefits: TDS (tax deducted at source) is not applicable on interest. According to an RBI notification, the capital gains tax arising on redemption has been exempted for an individual. The indexation benefits will be provided in case of LTCG arising to any person on transfer of bond.
Purity concern: Gold bond prices are linked to the price of gold of 999 purity (24 carats) published by India Bullion & Jewellers Association (IBJA)
The scheme has many other exciting features that investors should carefully evaluate before making the investment decision. The Government issues the bonds, and therefore, credit risk for the same is almost zero. Further, the bond provides interest at the rate of 2.50% p.a. which is payable semi-annually on the nominal value. Therefore, gold bond can give the returns in two forms, viz. capital appreciation as the gold price of the bond is linked with the gold price and interest income as against only capital appreciation accompanies by wear and tear due to physical holding of gold in the other option. Further, the gold bonds have a ready market, can be traded at the prevailing market prices, and thus provides liquidity. Since it is related to the market price of gold, the risk of capital loss may be there when the market rate of gold goes down, but it does not affect an investor’s units of gold. The gold bonds are traded in the secondary market, are redeemed at the end of eight years, and also have an exit option from the fifth year onwards. All three options provide adequate liquidity and surety of obtaining the value at which the gold is traded in the market. In case investors approach for premature redemption, request for early redemption can only be entertained if the investor at least one day before the coupon payment date approaches the concerned bank/post office.
Further, there is no transaction cost related to exit from the said scheme (provided the exit is not through the secondary market). There is also other cost savings for the investor opting for gold bonds, which include no storage cost, insurance for loss or theft. The scheme provides an exemption from capital gains tax if such gold bonds are held till maturity. This would act as a significant facilitator to the investors who desire to invest in gold for a long period, as it would lead to substantial tax savings on capital appreciation in gold prices. Further Sovereign Gold Bonds securities are eligible to use as collateral for loans from banks, financial Institutions, and Non-Banking Financial Companies (NBFC). However, it does not matter of right for the bank/financing agency to granting loans against SGBs. Some banks accept SGB as collateral/security against secured loans.
This scheme aims to minimize the generation of black money. Gold is one of the commodities that has been a victim of investment of black money in India. Though this scheme does not aim to bring the actual black money invested in gold within the purview of taxation, it aims to minimize future possible black money investment in this commodity. This scheme, thus, contributes to the robust and corruption-free nation-building activity of the Government. The price of the gold bond is tied to the market value of gold as a commodity. In the present context of falling interest rates, and Coronavirus outbreak, the gold prices are likely to appreciate in the future. In the global context, the US Fed rate cut is likely, and hence the sentiments for gold prices are high. This is because lower interest rates reduce the opportunity cost of investments.
The co-relation of gold prices with the stock prices is very low (at around 0.25) and, therefore, investments in gold act as an excellent diversifier to the existing portfolio. Investments in gold cannot give the returns as have been provided by the equity markets, but it can be used as an effective measure to reduce the volatility of the overall portfolio. Having evaluated various aspects of the gold bond, how it influences the lives of an ordinary person, it can be said that investment in the gold bond is a lucrative alternative when compared to holding gold in physical form. Therefore, it is advisable to invest in gold bonds to take advantage of such appreciation coupled with the interest income.
Important Features of Sovereign Gold Bond Scheme
Given below are some important features of the Scheme that will help you understand it better.
• It will be issued in the denominations of 2, 5, 10 grams of gold or other denominations.
• You can collect and redeem the bonds through Banks/NBFCs/Post Offices.
• Your Bonds to be used as collateral for loans and will have a sovereign guarantee.
• They can be easily sold traded on commodity exchanges.
• The main objective is to reduce the demand for physical gold and to Shift part of the estimated 300 tons of physical bars and coins purchased every year for Investment into ‘demat’ gold bonds.
Benefits of the Sovereign Gold Bond Scheme
Let’s have a look at the benefits that you will get under the Sovereign Gold Bond Scheme.
• It is available in both demat and paper form.
• The quantity of gold for which the investor pays is protected since you will receive the ongoing market price at the time of redemption/ premature redemption.
• The Sovereign Gold Bond is in physical form, so the risks and costs of storage are eliminated.
• Sovereign Gold Bond is free from issues like making charges and purity in the case of gold in jewellery form.
• The bonds are held in the books of the RBI or in demat form eliminating the danger of loss of scrip etc.
Limitations of Sovereign Gold Bond Scheme
Everything in this world comes at a price. Let’s have a look at the few limitations of Sovereign Gold Bond.
• The scheme will not appeal to those who want physical gold for jewellery or for future use.
• The success of the bond is also dependent on the distribution channels.
• There may be a risk of capital loss if the market price of gold declines.
• The government will have to bear the currency risk.
• The duration of the bond can also be a very important factor.
• Bank may have to provide ‘premature’ redemption facility.
Invest 5-10% of portfolio in sovereign gold bonds to guard against volatility
Gold prices in the domestic market hit an all-time high of Rs 43,250 late in February.
Investors looking for safety amid the wild swings in stock market triggered by the spreading coronavirus could opt for sovereign gold bonds (SGB). The 10th Series of the SGB, which will close on March 6, will allow investors to bet on gold without buying it physically. International gold prices are near their yearly highs as the precious metal is seen as a less risky option in uncertain times like now. Gold prices in the domestic market, which closed at Rs 42,276 on Tuesday, hit an all-time high of Rs 43,250 late in February.
“A turmoil in global markets on account of the virus spreading leading to a slowdown in economic growth is leading investors to buy gold as a safe haven,” says Pushkraj Kanitkar, head (research), GEPL Capital. Pushkraj expects gold prices in the domestic market to rise to Rs 52,000 per 10 grams over the next 18 months partly because of the sharp depreciation in the rupee to levels of Rs 76 a dollar over the next 6-12 months. The rupee closed at 73.29 on Tuesday.
Gold prices have moved up 26 per cent in the last one year, with the precious metal being among one of the best performers. In the same period, the Nifty 50 gave 2.87 per cent, while an investment in a liquid fund earned 6.01 per cent. In the last three- and five-year periods, the yellow metal has gained only 11.03 per cent and 8.05 per cent, respectively.
In sovereign gold bonds, investors get an additional 2.5 per cent interest every year over and above the price appreciation of the metal. Since they are held in the digital form, there is no cost of storage.
To encourage digital payments, the government is offering a Rs 50 discount per gram. Investors paying digitally get gold at Rs 4,210 per gram, while investors using the physical mode will have to pay Rs 4,260 per gram. Wealth managers believe investors should have an allocation of 5-10 per cent to gold in their portfolios as it acts as an insurance against global uncertainty and rupee’s depreciation. Gold also helps in portfolio diversification due to its low correlation with other asset class like equity and fixed income.
Sovereign gold bonds have a tenor of eight years, with investors having the option to exit after the fifth year on interest payment dates. The redemption price will be the simple average of the closing price of gold on the previous three days. In addition, they are traded on the stock exchange with investors having the option to sell anytime, though liquidity is low.
Why should you invest in sovereign gold bonds?
Gold has traditionally been a major investment product available for the generations up to our parents. Even in the present era where various financial products available, financial planners advise investment of certain percentage of your portfolio in gold for diversification. Indian and especially females are obsessed with gold, a major part of which is imported. Due to import of gold and oil the Indian currency is always under pressure. With the twin object of meetings the demand for investment in gold and ensuring that the balance of payments position is not adversely affected, the government has introduced gold monetization scheme in 2015. As a part of gold monetization scheme, the government of India has been issuing Sovereign Gold Bonds (SGB) from time to time through the Reserve Bank of India. The RBI has announced issue of Sovereign Gold Bond Series 1 for FY 2020-21 in monthly trances beginning from this month. The first tranche is open between 20th April 2020 till 24th April, 2020. Let us discuss the basic features of SGB.
Who can Invest in SGB and how?
Any resident under Foreign Exchange Management Act (FEMA) can invest in SGB. So an individual, HUF, trust whether a public or private and universities can invest in SGB. Even investment on behalf of a minor can be made by his guardian. KYC documents such as Voter ID, Aadhaar card/PAN or TAN /Passport are needed for buying the SGB.
Additionally, you need to have a PAN to invest in the bonds. Though an NRI himself cannot invest in these bonds through purchase of subscription, he is allowed to hold these bonds received as a nominee of a resident investor. The bonds can be bought from banks, Stock Holding Corporation, post offices and recognised stock exchanges.
The application for SGB has to be made in the minimum lot of 1 gram and in multiples of 1 gram maximum up to the permissible limits. An Individual and an HUF can invest up to 4 Kgs in SGB in each financial year. Other eligible entities can invest up to 20 Kgs in a year. While computing the limits the investments made through initial subscription and purchased both will be taken into account. The bonds can be held jointly but for the purpose of limit, it will be computed with reference to the first holder. The investors can make nomination in favour of any person in respect of the bonds subscribed or purchased by them.
Tenure and premature redemption of SGB.
The gold bonds have tenure of 8 years but the investors have an option to opt for early redemption after completion of 5 years on the interest payment dates. The investors have the option to have the bonds in physical form or in Demat form at the time of application. One can also get the physical certificates converted into Demat at later stage. Though the bonds have lock-in period of 5 years, investors can always get out of the bonds by selling it on stock exchanges.
Issue price and redemption price.
The sovereign gold bonds are issued at a nominal rate per gram. The nominal rate of the bonds is computed on the basis of simple average price of the 0.999 purity gold, as published by the Bullion and Jewellers Association Limited, of last three days of the week preceding the week in which the bonds are issued.
For the current trance issue open the price per gram is fixed at Rs. 4,639. There are more issues every month till September 2020 as per the calendar issued by RBI. For the investors who apply online and pay through digital mode are entitled to get a discount of Rs. 50/- per gram. The bonds will be redeemed at the price of gold prevailing at the time of redemption. The redemption price of the bonds at the time of redemption will also be computed in the same manner as issue price. Holder of the bond will receive interest annually @ 2.50% on the issue price payable half-yearly.
Taxation of interest and the profit on redemption of the bonds.
The interest received on SGB is fully taxable in the hands of the investors. However, any profit made on the redemption of the bonds will be exempt from capital gains tax. Please note that the exemption from capital gains is only available on redemption and not on sale on before redemption. In respect of bonds sold before redemption, you are entitled to avail the indexation benefit for computing capital gains.
Should you invest in Gold?
As gold provides protection against inflation and also affords liquidity in the time of political and economic instability, one should have a certain portion of his portfolio in gold. Since, In India, gold is gifted on all conceivable social occasions especially at the time of marriage of sons and daughters, one should invest in gold so as to have the gold readily available at the time of marriage in the family. As investments in gold through SGB earns you interest as well as appreciation. Since profits on redemption are tax-free, you should invest in the bonds so as to synchronise the redemption with occasion of marriage. Even in an emergency situation one can get loan against these bonds by offering it as security, so to that extent, the bonds are more liquid than many other investment products.
The views and the investment tips are entirely available on the website.
https://paisainvest.in/new.
We reach out our helping hands to you fellow people to provide a secure future.
https://paisainvest.in/new helps people to check with certified experts before taking any investment tips.
Why wait then?? Follow our website for more updates!!!