And the winner is “Sovereign Gold Bond Tranche III”

The government has been trying its best to curb the demand of gold and thus import of gold. An import duty of 10% was imposed on gold by UPA II in an attempt to rein gold imports and widen current account deficit. While these measure worked briefly, we saw reincarnation of 1970’s style gold smuggling as a by-product of such measure.

May 2014 saw change in guards at the centre and NaMo led NDA government came into power but import duty on Gold continued. However, the gold import started going up again. In Budget 2015, Finance Minister, Mr. Arun Jaitley announced two schemes. First, Gold Monetisation Scheme aimed to channelize gold lying in coffers of Indian households and temples. Second is Sovereign Gold Bond Scheme, to incentivise Indian citizens by providing more attractive alternative to invest in gold, but not in physical gold. These measures intend to achieve twin objectives of channelizing physical gold into economy and reducing the demand for physical gold and gold imports.

Let us now focus on Sovereign Gold Bonds as GoI is launching Sovereign Gold Bond Tranche III from tomorrow.

GoI launched first tranche of Sovereign Gold Bond in November 2015 and second tranche in January 2016 with following features.

  1. Sovereign Gold Bonds are issued by RBI in both Demat and paper form, on behalf of GoI and are distributed by various banks and post offices.
  2. The bonds can be subscribed by only resident Indian entities.
  3. The minimum permissible investment is 2 grams of gold and maximum amount is 500 grams per person in a financial year.
  4. The rate of interest is 2.75% per annum for 2015-16 and payable on half yearly basis.
  5. The issue price for the bonds is fixed on the basis of simple average of closing prices of gold with 999-purity during the previous week published by the Indian Bullion and Jewelers Association.
  6. On maturity, the investor will get the equivalent rupee value of the quantum of gold purchased at the then prevailing gold price, again calculated in the same manner as above.
  7. The tenure of the bond is 8 years with an exit option after 5 years. The bond is proposed to be listed on stock exchanges.
  8. The bonds are exempted from long-term capital gains on redemption and any transfer of bonds and long-term capital gains arising out of that also is eligible for indexation benefits.

GoI has already collected a total of Rs.1050 crores with Rs.246 crores via first tranche and Rs.798 crores in the 2nd tranche.

Now, the GoI is coming up with third tranche of Sovereign Gold Bonds from March 8, 2016 to March 14, 2016. This time around Finance minister has given a tweak to the scheme and proposed to exempt such bonds from long term capital gains tax on redemption. This is going to be a game changer in my view. Besides, gold has made a strong comeback by rallying over 20% in past two months. Recently while asset class like equity has disappointed during the same period, gold has made investors think about investing into yellow metal once again. The issue price for the third tranche is fixed at Rs.2916 per gram of gold that is already at a few percentage discount to the closing price on March 4, 2016 as gold rallied during the 2nd half of the last week. Situation is ripe for the third tranche to become a grand success for the Government.

Not only new investors, but also all those who are holding investments in Gold ETFs and Gold funds should immediately switch to gold bonds as gold bonds win hands down over other alternatives of gold investments. At least those of us, who are investing in gold with 5 years horizon and don’t treat it as liquid option, must switch to gold bond.

An article from an InvestmentWaves founders in DNA Money on 14th February 2007 was titled “Gold ETF: A new kid on the investment block”, just a day before the launch of India’s first Gold ETF – GOLDBEES. It was then argued that, investing in Gold ETF is more convenient and more rewarding compared to physical gold. It really turned out that way and we saw launch of Gold ETFs by almost every fund house. However, now with the launch of third tranche of Gold bond by GoI with added arsenal of tax exemption of interest, we believe, Gold ETFs don’t stand a chance.

Criteria

Sovereign Gold Bond Tranche III

Gold ETF

Interest Income

2.75% per annum

Nil

Long
term capital gains tax

Not taxable on redemption and benefit of indexation on transfer

LTCG tax after 1 year of holding (unlike 3 years for physical gold)

Fees and
Expenses

Nil

1% to 1.5%

Brokerage and impact cost

Nil

Depends on your broker
and market conditions

Correlation
with gold price movement

1.00

Close to one but not
one: around 10% is maintained in cash or debt

If you hold less than 500 grams worth Gold ETF or even physical gold (provided you have purchased with white money!), you should immediately sell it and park that money into gold bond. This will give an advantage of close to 4% per annum. 2.75% of interest on bonds and the investor doesn’t have to bear expenses/fees of Gold ETFs that is around 1 to 1.5% per annum across schemes! Not only that, you will save on long term capital gains tax as gold bonds are proposed to be exempted from long term capital gains tax if redeemed with GoI and not transferred. Essentially, this means, invest into gold for five/eight years and if gold has appreciated significantly during this period, there is a clear tax advantage over Gold ETF as ETFs don’t enjoy exemption from LTCG tax. Besides, you don’t have to incur transaction cost on account of buying and selling of gold ETF. You also don’t incur impact cost, if any, on the day you transact. Liquidity aspect of Gold ETF is exaggerated as gold bonds are going to be listed on the exchanges. In addition, in worst-case scenario, gold bonds can also serves as source of liquidity as one can take loan against gold bonds!

In closing, for any savvy investor with any investment interest in gold as an asset class over a period of next five to eight years, this a golden opportunity coming from Government of India. I am going to redeem my gold ETF and moving to Gold bond, as I believe everyone should do the same.

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5 Comments

  1. Sadananda Nayak

    Reply

    Is the interest really tax exempt? It not mentioned anywhere. I believed only the LTCG was exempt on redemption.

  2. Mayank Baxi

    Reply

    Investing in Gold Bonds will prove wiser in five / eight year horizon….. certainly

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