<div><em>Taxation and pricing holds the key for the success of Sovereign Gold Bonds scheme, writes <strong>Sunil Dhawan</strong></em></div><div> </div><div>We, as Indians are obsessed with gold. Every year we import about 800 tonnes of gold and a large portion of that is used for making jewellery. The demand for physical bars and coins is around 300 tons every year.</div><div> </div><div>According to the World Gold Council, over the next decade, there are likely to be 15 million weddings per year in India, where more than half of the population is under 25. If not jewellery, there has to be a better option available with Indians to invest in Gold. And yes, we have Gold Exchange Traded Funds (Gold ETF) and the recently approved (yet to be launched), Sovereign Gold Bonds Scheme by government of India. </div><div> </div><div>Let’s see how comparative Gold ETFs and Sovereign Gold Bonds are under the current structure.</div><div> </div><div><strong>Cost:</strong> The high initial buying and even selling charges that goes into owning jewellery, bars or coins gives an extra edge to the low-cost Gold ETF’s and Sovereign Gold Bonds. The initial cost in owning physical gold can be as high as 25 per cent. In Gold ETF’s, the cost incurred could be around 1-1.5 percent of the amount invested. It also saves the trouble of keeping the physical gold and what’s more, the transparency in pricing is another advantage. In case of Sovereign Gold Bonds, it appears that there will not be any entry charge and even the fund management cost as seen in Gold ETF will not be there. The issuing agency which would pay distribution costs and a sales commission to the intermediate channels would be reimbursed by Government. </div><div> </div><div><strong>Pricing</strong>: In Gold ETF, the pricing is transparent. The price on which Gold ETF unit is bought is probably the closest to the actual gold prices and therefore the benchmark is the physical gold price. For Sovereign Gold Bonds , the Government will issue bonds with a rate of interest to be decided by the Government. The rate of interest will take into account the domestic and international market conditions and may vary from one tranche to another. This rate of interest will be calculated on the value of the gold at the time of investment. The rate could be a floating or a fixed rate, as decided. <br> </div><div>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 LTV purpose and disbursement of loans. </div><div> </div><div><strong>Holding mode:</strong> The Sovereign Gold Bonds will be available both in demat and paper form, while for Gold ETF one needs a trading account with a share broker and a demat account. It remains to be seen how existing brokers make available the Sovereign Gold Bonds along with Gold ETF’s in their offerings. </div><div> </div><div><strong>Limits:</strong> Sovereign Gold Bonds will be issued in denominations of 5, 10, 50,100 grams of gold or other denominations, and the cap remains at 500 grams per person a year. In Gold ETF’s, one my create SIP and even a gram of gold can be bought online, with no upper limit of investment. Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of gold and is capped at 500 grams per resident Indian person per year. They will carry sovereign guarantee both on the capital invested and the interest declared and accrued to the bonds. </div><div> </div><div><strong>Where to Buy:</strong> Issuing agencies would be the designated banks, NBFCs, Post Offices, National Saving Certificate (NSC) agents and others, as specified. They would be authorised to collect investments and even redeem bonds on behalf of the government. Gold ETF can be bought from a broker’s online account, example icicidirect, hdfcsecurities. </div><div> </div><div><strong>Liquidity:</strong> The tenor of the bond could be for a minimum of 5 to 7 years unlike Gold ETF where units can be liquidated anytime. Bonds can however be used as collateral for loans. Further, bonds would be allowed to be traded on exchanges to allow early exits for investors who may so desire. </div><div> </div><div><strong>Taxation: </strong>Currently, Gold ETF holds advantage over Sovereign Gold Bonds as far as taxation is concerned. Gold ETF units are subject to tax according to a non-equity mutual fund. For short-term gains below 36 months, gains are added to income while on long term gains, indexation benefit is provided. </div><div> </div><div>In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold for an 'individual' investor". The department of revenue has said that they will consider indexation benefit if bond is transferred before maturity and complete capital gains tax exemption at the time of redemption," Economic Affairs Secretary Shaktikanta Das told reporters, after the Cabinet approved the scheme.</div><div> </div><div><strong>On maturity:</strong> On maturity, the redemption will be in rupee amount only. The rate of interest on the bonds will be calculated on the value of the gold at the time of investment. 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, or for any other reason, the depositor will be given an option to roll over the bond for three or more years. Remember, any upside gains and downside risks will be with the investor and the investors will need to be aware of the volatility in gold prices. </div><div> </div><div><strong>End note: </strong>The pricing will be important especially when an alternative in the form of Gold ETF exists. Also, taxation concern will not be clear till next budget. Still, as of now taxation is at par with physical gold. Capital gains tax exemption will make gains tax-free thus giving a fillip to the scheme. Should you invest in gold bonds when they are launched? Keep watching this space.</div><div> </div>
