The Union government announced its decision to issue the fifth tranche of Sovereign Gold Bonds (SGB) in consultation with the Reserve Bank of India (RBI). Applications for the bonds are being accepted from 1 September 2016 to 9 September 2016. The fifth tranche is priced at Rs3,150 per gram of gold. The rate has been fixed by the RBI on the basis of simple average of closing price for gold of 999 purity of the previous week (August 22-26, 2016) published by the India Bullion and Jewellers Association Ltd (IBJA). The current price is slightly higher than the earlier tranche. The RBI had fixed the issue price of sovereign gold bonds at Rs3,119 per gram for the fourth tranche of subscription (from 18 July to 22 July 2016).
The bonds will be issued on 23 September 2016. The bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated post offices and recognised stock exchanges - National Stock Exchange of India Limited and Bombay Stock Exchange.
To make the scheme attractive, capital gains tax arising on redemption at time of maturity of the SGB to an individual has been exempted. Long term capital gains tax is applicable if gold bonds are sold after three years. The minimum investment has been reduced from 2gm to 1gm; the maximum remains at 500gm. The bonds offer 2.75%pa (per annum) interest. The interest is still kept taxable.
The recent jump in gold prices due to global factors has helped the trading of SGB on the exchanges. Investors in the first tranche, issued in November 2015 at Rs2,682, are seeing a premium of 25% in its prices. The trading volume is also increasing which is an encouraging sign. It can help to generate interest in SGB tranches in future.
The scheme does not provide for getting physical gold on maturity, and you can get the equivalent amount only in rupees. SGB is touted as the best option to take exposure to gold, but in reality the buyer of the bond may gain if the price of gold is higher or may lose if the gold price is lower than the price paid by the investor. And nobody can predict with any certainty what will be the price of gold at the end of five or eight years from now. It is nothing but a speculative investment with a small interest benefit thrown in.