17 Apr 2018 19:59 IST

Smartest way to invest in gold

Sovereign gold bonds come with benefits that ETFs and physical gold don’t have

People who want to purchase gold for Akshaya Tritiya should consider investing in sovereign gold bonds. The current financial year’s first tranche of the bonds opened on April 16 and will close on April 20.

There are several options for those who want to invest in gold — gold fund of funds, gold exchange-traded funds (ETFs), buying physical gold at a jewellery store, through Paytm or the Stock Holding Corporation’s platform (both of which are offered in association with precious metals refining company MMTC-PAMP) — but the sovereign gold bond has its advantages. The investment cost is lower due to the absence of charges such as fund management fee (as in ETFs or fund of funds) or making or wastage charges, which are added to the cost of physical gold. Investors also get a coupon of 2.5 per cent per annum on the face value of the bond.

Features of sovereign gold bonds

The issue price of the bond has been fixed as ₹3,114/gm. To encourage digital payment, there is a discount of ₹50/gm for those who subscribe online and pay through a digital mode. KYC documents such as voter ID, Aadhaar card, PAN or TAN and passport are required for investment.

The maximum amount one can invest is 4 kg a year (April-March) for an individual and Hindu Undivided Family (including investments made through the secondary market in the bond).

The coupon on the bond is 2.5 per cent per annum. This will be paid bi-annually and will be calculated on the nominal value of the bond (value of gold at the time of investment). Redemption of the bond will be at the market price (average of last three days) as on the date of maturity.

The tenure of the bond is eight years, but premature exit is allowed from the fifth year. The bond will be listed on stock exchanges within a fortnight of issuance, enhancing its liquidity .

The holder can request a physical certificate or invest in demat form. It is wiser to request for demat holding as it helps sell the bond on the exchange platform in the future, in case of emergencies. For both investors and consumers, this bond is the best option to buy gold. The cost of investment is lower in these bonds as there is no making/wastage charges and no cost of safekeeping in a vault. It also scores over gold ETFs, where there is fund management charge.

Also, akin to physical gold, you can pledge these bonds and raise a loan. The loan-to-value ratio — how much money one is eligible for on the pledged value of gold — is equal to the limit set by the RBI for an ordinary gold loan.

How much is the tax?

If you hold the bond till maturity, the capital gain you make is tax exempt. This is an advantage over investing in physical forms of gold, say coin, bars or jewellery. Even if you exit prematurely (at the end of the fifth, sixth or seventh year) you will still enjoy the tax benefit.

The interest received on these bonds, though, will be subject to income-tax based your tax slab at any time. However, if you buy or sell in the secondary market, capital gains tax provisions as per the Income-Tax Act apply — if held for 36 months or less, the tax is at slab rates, and if held for more than 36 months, tax is 20 per cent with indexation benefit.

How to buy

The sovereign gold bond is sold through banks, the Stock Holding Corporation of India Limited, designated post offices and stock exchanges — the NSE and BSE. Your stock broker can also offer it to you online.

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