SOVEREIGN GOLD BOND
Aimed at providing an alternative to buying physical gold, the government has launched a sovereign gold bond scheme. The scheme offers investors a choice to buy bonds worth 2 grammes of gold and up to a maximum of 500 grammes. The duration of the scheme is for eight years with exit option from fifth year to be exercised on the interest payment dates.
HOW IT WORKS?
The scheme allows you to invest in gold in paper form. It is denominated in multiples of grammes(s) of gold with a basic unit of 1 gramme. At the time of exiting the scheme, you will be paid for number of units bought by you based on prevailing gold prices. Upside gains and downside risks will be with the investor. The interesting part is over and above the prevailing prices, you will also be compensated at a fixed rate of 2.75 per cent per annum payable semi-annually on the initial value of investment.
If you buy 20 units of gold (the rate is fixed by the Reserve Bank of India) at Rs 53,680, after eight years you will get Rs 11,809 as interest amount. Over and above this, you will be paid for 20 units based on prevailing gold prices. Applications for the bond will be accepted from November 5-20. The bonds will be issued on November 26. The bonds will be sold through banks and designated post offices. You can also convert it into demat form.
Other than the appreciation in gold prices, you are guaranteed interest at 2.75 per cent annually. The bonds can also be used as collateral for loans. One also stands to gain an additional up to one per cent, which was the expense ratio charged in exchange traded funds (ETFs). Under SGB, commission of one per cent will be paid by the government to distributors.
You do not get physical possession. It is in paper form. Moreover, these bonds are open for subscription for a limited time. The investor has to buy at a pre-determined rate. For example, for the first tranche, the RBI has announced the gold bond rate for 1 gramme at Rs 2,684, and within a week's time, the price has dropped to Rs 2,588 per gramme. Unlike, ETFs, you cannot buy it every month giving you average cost benefit. Moreover, the interest on gold bonds is taxable and the capital gains tax shall also remain same as in the case of physical gold and ETFs. In effect, it means that interest earned on gold will be added to income and is taxable as per one's tax slab. In case, the bonds are sold before three years, the gains are taxable as per one's tax bracket. If sold after three years, then gains would be treated as long term capital gain wherein a tax rate of 20 per cent with indexation as applicable.
GOLD COINS FROM MMTC
The government has launched from November 5 coins bearing the Ashok Chakra in denominations of 5 and 10 grams and bar or bullion of 20 grams through MMTC outlets. A finance ministry statement said that 15,000 coins of 5 grammes, 20,000 coins of 10 grammes and 3,750 gold bullion will be available initially. The gold coin is part of the gold monetisation scheme. The coin has Ashok Chakra engraved on one side and the face of Mahatma Gandhi on the other. The 10 gramme coin of 24 karat purity and 999 fineness is available at`28,850 (excluding VAT and other taxes). Initially, coins are available in 16 cities at recognised MMTC outlets.
This is the first time you can buy national coins over imported coins. They may charge a premium but would be less compared with banks. The main advantage is peace of mind as you are assured of the purity.
MMTC is not permitted to buy back the gold from you.
GOLD COINS FROM JEWELLERS
You can also buy coins from a jeweller. But before buying, do ask what is their resale policy. Do they accept it at the prevailing rates or buy back at a discounted rates. You can also buy coins from banks.
Banks and big retailers assure you of purity of gold and it comes with tamperproof packing. Local jewellers may offer you coins at the cheapest rate of Rs 26,000-Rs 27,000 but trust is the factor that you need to consider while buying gold from the local jeweller.
Buying from banks can be bit costly as they charge a premium of 10-15 per cent over prevailing gold prices. For example, ICICI Bank is selling 10 grammes of gold coin at Rs 29,567.64. Moreover, banks are not permitted to buy back the gold they sell.
You can buy gold in electronic form through your Demat account widely known as ETFs. These funds are listed on the exchanges and can be traded just like other shares. Several mutual funds currently offer gold ETFs linking it to international gold prices.
You do not get physical possession. Moreover, you need to have a demat account to buy ETFs.
There is an expense ratio of around one per cent on ETFs. It makes it costly compared with sovereign gold schemes.
(In Association with Mail Today)