10 things to know about Sovereign Gold Bond Scheme

They can be used as collateral for loans and can be sold or traded on stock exchanges

The government on Tuesday approved the Sovereign Gold Bonds Scheme, which was announced in the Budget 2015-16. As investors will get returns that are linked to gold price, the scheme is expected to reduce the demand for physical gold.

The bonds will offer same benefits as physical gold. They can be used as collateral for loans and can be sold or traded on stock exchanges as they are available in demat form. At the same time investors need not worry about holding physical gold.

Modalities of the scheme

The gold bonds will be issued by the Reserve Bank of India. Since these are Government of India bonds, they are sovereign. The bonds will be denominated in grams of gold. Investors can pay money and buy these bonds from intermediaries, who will be announced later.

The bonds can be purchased only by resident individuals or entities. There will be a cap on bonds that can be purchased. It could be 500 gms per person per year.

The government will decide the rate of interest. The rate will be calculated on the value of the gold at the time of investment. It could be floating or fixed rate. The principal amount of investment, which is denominated in grams of gold, will be redeemed at the price of gold at that time. If the price of gold has fallen from the time that the investment was made, the depositor will be given an option to roll over the bond for three or more years.

The bonds will be available both in demat and paper form. They will be issued in denominations of 5, 10, 50, 100 gms of gold or other denominations.

The bonds will be issued and redeemed by banks, non-banking finance companies, National Saving Certificate (NSC) agents for a fee. This fee will be decided later.

The price of gold may be taken from the reference rate, as decided and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption. This rate will be used for issuance, redemption and Loan to Value purpose and disbursement of loans.

The tenor of the bond could be for a minimum of five to seven years.

These bonds can be used as collateral for loans. The LTV will be equal to that of ordinary gold loans. As per RBI regulations, the maximum LTV allowed for gold loans is 75 per cent.

It will be possible to sell and trade the bonds on exchanges, in case investors want to redeem them before maturity. The KYC for the bonds is same as that for gold. Currently, if you purchase gold worth more than Rs 50,000 you have to show proof of KYC, such as PAN card, etc.

Capital gains tax will be the same as for physical gold for individual investors. This means that short-term capital gains tax will apply if you sell within three years. The profits will be added to your income and taxed at income slab. Long term capital gains tax is 20 per cent with indexation.