Know the changes made in fourth tranche of Sovereign Gold Bonds

Know the changes made in fourth tranche of Sovereign Gold Bonds

SGB still remains the best bet for portfolio diversification, above all the available options

 Jinsy Mathew   
  • July 19, 2016  
  • |  
  • UPDATED   11:24 IST

 The applications for the fourth tranche of the Sovereign Gold Bonds (SGB) will be accepted starting today onwards continuing till the end of this week (July 22). This batch of bonds is to be issued on August 5, 2016. The most important point to note is that the issue price stands at Rs 3,119 per gram, which is relatively higher than the last two tranches issued at Rs 2,600 and Rs 2,916 per gram, respectively.

In case you are ready to dismiss this information as just another tranche being issued; it would do good to check the specifications this time around. This is because of the changes brought about since the last issuance in March 2016.

Changes made

Following is a snapshot of the changes brought about in this tranche:

Why consider SGB

  • Investment ticket size is as low as One gram
  • Earn a fixed rate of 2.75% per annum, payable semi-annually, on the initial value of investment
  • Even though it comes with a tenure of eight year, exit options are available after 5,6 and 7th year
  • Available both in paper and demat form
  • Tradable on the exchanges
  • Can be used as a collateral for loans
  • No risk of theft attached as in the case of holding physical gold
  • Long term capital gains (LTCG) tax applicable if sold after 3 years. However, the same will be zero if redeemed on maturity
  • Indexation benefit provided to long term capital gains arising at the time of sale
  • Individuals exempted from capital gain tax arising on redemption of SGB
  • No TDS on interest paid on these bonds
  • Since SGB is backed by the Government, there is no price risk associated

Expert Take

Sanjay Matai of The Wealth Architects is of the view that SGB is the option to go for if one is buying gold for a future event. He adds, "Bonds give you that extra interest income which hoarding jewellery, bars or coins can't deliver. Other than this, one needn't worry of gold impurity and wasteful making charges."

When it comes to taxation aspect, with the latest change made, SGB comes at par with that of physical gold on capital gains. In India, one can hold on to physical gold for as many years as wanted without worrying about capital gain liability as it would arise only at the point of selling. Contrast this with SGB which matures after eight years; the subscriber would end up facing capital gain liability in eight years. This mismatch was seen as one of the points working against SGB.

Now with the latest clarification, Deepesh Raghaw, a Securities and Exchange Board of India (SEBI)-registered investment advisor, notes that incase if a subscriber decides to redeem the bonds after eight years, then he/she is exempt from capital gains tax. Though this was the case even before, there was no mot clarity on this point. However, the one main point to note here is that this exemption is only in cases of redemption i.e. selling back to Government. However, sale on exchanges may give rise to capital gains tax liability.

Even though being listed on the exchanges mean enhanced liquidity, the experience thus far has been mixed. Raghaw notes that for the first tranche of bonds listed on the exchanges; the average daily volume over the last 30 days was of only 156 bonds which invariably lead to high bid-ask spread. However, going forward the situation may improve as the subscriptions for the second and third tranche of bonds were much higher than the first one, leading to more liquidity.

To sum up, gold is a requirement for a balanced portfolio as it provides the much required hedge in times of turbulence. And for such a function, SGB is a perfect fit. The subscriber will not only accumulate gold but also earn for holding the same, making it a win-win situation, for the investor.