The fourth tranche of Sovereign Gold Bonds (SGB's) are open for subscription right now, from Sept. 1st to Sept. 9th, 2016. They are bonds:
- with the sovereign guarantee of the Indian Government,
- linked to the price of gold,
- available in 1 gram multiples,
- carrying an interest rate of 2.75 percent per annum, payable half-yearly,
- with an eight-year tenor,
- to be redeemed at the end of eight years, with an option to redeem prematurely at the end of 5th, 6th or 7th years
Each individual can subscribe upto 500 gm. In case of joint holdings, the first holder shall be considered for this limit
Liquidity (apart from redemption on fixed dates) will be through listing in the secondary market
The tax treatment is as follows:
- Any gains (or losses) on sale of these bonds shall be treated as Capital Gains, with the normal provisions applicable for most capital assets, i.e.
- long term means greater than three years,
- long term gains will be taxed as per the following formula: tax payable will be 20% of the sale price less indexed purchase price.
- Short term gains (if held for less than three years) will be taxed at the normal rates on your marginal slab rate, meaning the gain will be added to your normal income for all practical purposes for the purpose of tax
- For the fourth tranche (the current one), the government has notified that any individual "redeeming" the bonds (i.e. not selling in the secondary market), will be exempt from capital gains tax (CGT). What this means is that if you subscribe to the bonds now, and hold till maturity, or redeem them prematurely through the normal window, there will be no CGT.
If you sell the bonds somewhere along the way in the secondary market without waiting for redemption, then the usual capital gains rules explained in the previous bullet-point will apply.
My reading is that it also means that if you buy these same bonds later in the secondary market, and then "redeem" them, no tax should be applicable, though I have not seen any specific clarification anywhere on this.
- The interest of 2.75 percent per annum will be taxed as any normal income - i.e. at your applicable slab rates
- There will be no TDS deducted either on the interest or on redemption.
TO INVEST OR NOT TO INVEST?
This question is better answered keeping in view broader asset allocation objectives. Your money can broadly be invested in four different asset classes: Debt, Equity, Gold (includes Siver) and Real Estate. Contrary to what some banks who are into "fee-based income" might claim, I don't think commodities, derivatives, or forex trading are asset classes.
Within that broad portfolio it is generally recommended that you hold 10 to 15 percent in Gold. However, I know people who would want zero gold in their portfolio, and some who would want more than fifteen percent.
The characteristics of Gold are:
· It is a conservative asset. In the long run, it is likely to give returns averaging to a little above inflation
· It automatically protects you from Indian Rupee depreciation against the dollar, since gold prices which are denominated in dollars, are uniform worldwide
Gold can be bought as:
· Ornaments: Ornaments are not an "investment", so we shall not discuss that further
· Physical Gold:
o Is the best form of investment in gold.
o Only buy 24 carat gold biscuits, and buy from the wholesale markets (like Zaveri Bazar in Mumbai). Never buy from a bank, that is the stupidest thing you can do, since you will end up paying high margins on what is essentially a commodity purchase.
o I am assuming that physical gold purchases and sales will be in cash, so taxes, both direct and indirect, don't apply – I am not talking law here.
o Physical Gold has no 'management fees' like in ETF's, or counterparty risk
o If you are investing in gold as the 'ultimate fallback asset' in case of any major calamity or war, etc., physical gold kept in your possession is the best
· Electronic Gold:
o This includes ETF"s and SGB's.
o ETF's carry a counterparty risk. They don't necessarily have all that gold kept in their vaults. Some of it may be merely "gold-backed securities" and some of the gold may be lent out in the market. Further, in case of a national emergency, the government can easily lay its hands on that gold.
o ETF's charge 'management fees' averaging to one percent per annum, which is a continuous drain on your return.
o Capital gains on ETF's are taxable.
o SGB's carry a sovereign guarantee – for an Indian citizen this equates to zero risk. Also, they pay interest. Further, with respect to the fourth tranche, Capital Gains Tax is exempt under the conditions already explained above.
o Therefore, SGBs are definitely superior to ETF's, except for the fact that ETF's have more liquidity. Though the SGB's are listed they may not be as easily tradable, since the market is likely to be shallow
Recommendation: SGB's are a good product (especially fourth tranche) to consider including in your portfolio.