The Indian government is reportedly considering the discontinuation of Sovereign Gold Bonds (SGBs), according to a CNBC-TV18 report citing government sources. This potential move stems from the bonds being deemed “expensive and complex.”
Introduced in 2015 to reduce gold imports, SGBs represent a paper-based investment in gold. Since their launch, investors have committed Rs 72,274 crore across 67 tranches of SGBs issued by the Reserve Bank of India (RBI) on behalf of the government. Four tranches have already matured, with early investors more than doubling their initial investments thanks to payouts from the government.
The financial obligations of these bonds have surged significantly. As per the latest budget documents, the government’s liability to investors has soared to Rs 85,000 crore, a dramatic increase from less than Rs 10,000 crore at the end of March 2020. This growing financial burden is a key factor driving the possible discontinuation of the SGB scheme.
Even before any official announcement, the market has reacted. There has been a notable increase in demand for SGBs in the secondary market, with some investors paying up to 8% more than the government’s reference price as of August 14.
Sovereign Gold Bonds are government securities priced in grams of gold, offering an alternative to physical gold holdings. Investors purchase these bonds at a set price and receive cash upon redemption at maturity. Issued by the RBI on behalf of the government, SGBs come with several key features:
Eligibility: Available to resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
Denominations: Bonds are issued in multiples of one gram of gold.
Tenure: The bonds have an eight-year holding period with an option for early redemption after five years.
Limits: Individuals can invest in a minimum of 1 gram and up to 4 kg per fiscal year, with the same limit applying to HUFs. Trusts and similar entities can invest up to 20 kg annually. In joint holdings, the 4 kg limit applies to the primary applicant.
Redemption Price: Based on the average closing price of 999 purity gold over the last three working days, published by IBJA Ltd.
Interest Rate: Fixed at 2.50% per annum, payable semi-annually.
KYC Norms: Same as for physical gold purchases.
Collateral: Can be used as collateral for loans.
Tax Treatment: Interest is taxable, but capital gains tax on redemption is exempt. Long-term capital gains from the transfer of SGBs benefit from indexation.
Tradability: SGBs are tradable on the market.
The potential discontinuation of SGBs reflects the government’s need to balance financial obligations with investor interests. Whether or not the scheme will be phased out, the current developments highlight its significant role in India’s investment landscape.
