Explain Sovereign Gold Bond in 500 words
Sovereign Gold Bond (SGB) is a government security issued by the Reserve Bank of India (RBI) on behalf of the Government of India. Introduced in 2015, it provides an alternative to holding gold in physical form and is designed to track the domestic price of gold. The main objective of this bond is to reduce the demand for physical gold, thereby reducing India's reliance on gold imports.
These bonds are denominated in grams of gold and can be purchased instead of physical gold. The minimum investment in these bonds is one gram of gold, with a maximum limit of four kilograms for individuals and 20 kilograms for trusts and similar entities per fiscal year. The bonds have a tenure of eight years, with an exit option available from the fifth year.
Investors receive a fixed rate of interest on their investment. The interest, usually around 5% per annum, is paid semi-annually on the nominal value of the investment. The bonds are tradable on stock exchanges within a fortnight of the issuance, providing liquidity to investors.
The price of the SGB is linked to the price of gold of 999 purity published by the India Bullion and Jewellers Association Limited. The issue price is calculated in Indian rupees on the basis of simple average of closing price of gold of 999 purity of the last three business days of the week preceding the subscription period.
One of the key advantages of SGBs over physical gold or gold ETFs is that they offer an additional interest income over and above the gold price returns. Moreover, they are more secure as they eliminate the risk of theft and the cost of storage. These bonds can be used as collateral for loans and are also eligible for conversion into demat form.
SGBs are tax-efficient as well. The interest earned on the bond is taxable as per the provisions of the Income-tax Act, However, the capital gains tax arising on redemption of SGB to an individual has been exempted. This makes them a preferred choice for investors looking to invest in gold.
In conclusion, Sovereign Gold Bonds are a safe and lucrative investment option for those looking to invest in gold. They not only provide the benefits of physical gold investment but also provide additional returns in the form of interest. They are a risk-free investment as they are backed by the Government of India. Additionally, they also contribute to the country's economic stability by reducing the demand for physical gold.