<div><strong>By Sunil Dhawan</strong><br><br><em>Even though the interest rate being offered is marginal, it should help in owning paper-gold rather than physical gold which has its own concerns of cost of owning, purity, and security</em></div><div> </div><div>Turning gold into an earning asset is a reality now. Government has launched the sovereign gold bonds, 2015 scheme (GBS) for the benefit of those who wish to invest in gold. Rather than owning gold in physical form and keeping it idle without earning anything on it, GBS gives an opportunity to own gold and yet earn interest on it. </div><div> </div><div>The government will keep allowing the sales of GBS for a limited period through banks and post offices. The initial launch happens from November 05, 2015 to November 20, 2015. </div><div> </div><div><strong>Interest rate and taxation</strong>: The government has fixed interest of 2.75 per cent per annum on the investment. Its fixed rate and there is no compounding of interest. Interest shall be paid in half-yearly rests and the last interest shall be payable on maturity along with the principal. It will also be important to re-invest the half-yearly interest as the amount could be low and used up unnecessary. To put interest amount in perspective, on an investment of Rs 1 lakh, an amount of Rs 2,750 received yearly yields Rs 22,000 after 8 years. An option by banker and post office to direct such amount to savings account would help accrue more.</div><div> </div><div>Interest on the Bonds is fully taxable as per the tax rate of investor. For someone in 10, 20, 30 per cent tax rate, the post-tax return come to 2.47 per cent, 2.18 per cent, 1.9 per cent respectively. On maturity, the difference in prices (buy and redemption price) may give rise to capital gains and it will be treated as that for physical gold. </div><div> </div><div>Gold if transferred after holding it for 36 months or more is subject to 10 per cent tax or 20 percent after indexation. For short-term gains below 36 months, gains are added to income. In Sovereign Gold Bonds, capital gains tax treatment will be the same as for physical gold or gold ETF's. </div><div> </div><div><strong>Eligibility</strong>: Only resident Indians can invest in GBS either individually or jointly or in the name of minor as well. The investment can be held in paper form a certificate or in the demat form too. </div><div> </div><div><strong>How Much</strong>: Minimum investment in the Bonds shall be 2 grams with a maximum subscription of 500 grams per person per fiscal year (April - March). In case of joint holding, the limit applies to the first applicant. The denomination however will be in units of one gram of gold and multiples thereof.</div><div> </div><div><strong>Issue Price</strong>: Price of the Bonds shall be fixed in Indian Rupees on the basis of the previous week's simple average closing price for gold of 999 purity, published by the India Bullion and Jewellers Association Ltd. (IBJA).</div><div> </div><div><strong>Redemption</strong>: The bonds have a tenure of eight years. The investor would be given an option to roll over their holdings for an additional period. However, one may withdraw prematurely from fifth year of the date of issue on the interest payment dates. </div><div> </div><div><strong>Liquidity</strong>: One may pledge these bond certificate as a collateral for loans. The Loan to Value ratio will be as applicable to ordinary gold loan mandated by the RBI. The transferability of such bonds is also allowed thus proving liquidity as well. Further, trading may also be allowed in such bonds. </div><div> </div><div><strong>End note</strong>: The initial cost of owning physical gold in the form of bars, coins is anywhere around ten per cent and even higher for jewellery. GBS and Gold ETF, both paper gold are cost effective and costing would be around 1 percent. GBS should benefit those who invest in gold for a longer period. However, Gold ETF provides much better liquidity than GBS. Owing units is much easier than GBS as it's entirely online in case of ETF's. The risk of owning, holding also doesn't exist in both. Also, taxation is similar in both. The only disadvantage is that Gold ETF units won't be earning the additional interest of around 2 per cent per annum for you. Get clarity as to why you need to invest in gold- is it for marriage purpose or for pure investment. Anyhow, for investments, one should not have more than 10 percent of total portfolio in gold. Choose between Gold ETF's or GBS depending how comfortable you are managing investments online and keep the worries of purity, security aside.</div>
