The government on Friday announced several changes that would increase the attractiveness of sovereign gold bonds.
The most important change is that these bonds will now virtually be available on tap, as the issue that opened on Monday will remain open until December 27. However, the long-tenure issue will see the setting of price on a weekly basis. According to the Reserve Bank of India's (RBI's) announcement, every week, the bonds subscription will open on Monday and close on Wednesday. The price for that will be the previous last three trading days' average price for 999 purity.
The bonds sold between October 9-11 will be issued on October 16 and will get listed on stock exchanges two weeks after that. The issue that opened on Monday is priced at Rs 2,956 per gram and at Rs 2,906 per gram for online investment.
Next week, the bonds will open for subscription on October 16 and remain open until October 18. This system will continue till December 27, which is a Wednesday.
The second important change is the weekly price fixation, which would help investors to average their cost of buying.
Third, such a long period with weekly price changes will allow investors to plan the buying of bonds like physical coins according to occasions, like auspicious buying on Dhanteras next week or for gifting occasions that are date specific. In the past, when such occasions came, there might not have been any bond issue open. So far, such planning was possible only for buying physical coins or exchange traded funds (ETFs). Like in the case of ETFs, now investors can opt for systematic investment plans in bonds.
The fourth important change is that annually, the per person limit has been raised to 4 kg from the previous limit of 500 grams. High net worth investors (HNIs) were not interested in putting money as a portfolio diversifier in gold with only up to Rs 15 lakh as estimated price for 500 grammes of gold. Financial planners and banks had made representations that this limit should be raised. Under the new limit, HNIs are comfortable buying gold bonds, while earlier they had stuck to buying ETFs or physical gold.
For trusts and similar entities, 500 gram per annum was not at all practical, especially for big entities. The new limit for them is 20 kg, which, while better, is not enough for all of them.
The fifth change is regarding the timing from October to December. The period covers all important festivals of India – from Dhanteras and Diwali to Christmas. More importantly, this is the period of the kharif produce's arrival and farmers accumulate funds, which they partly invest in gold. The bond issue period is long enough to cover this period and farmers can buy bonds as they have started receiving money in their bank accounts.
However, there is a flip side too. Investors in bonds were offered Rs 50 per gram as discount. This discount has now been made available to those who buy it digitally or online. Those still going to bank branches or post offices and filling up physical forms will not get the discount. In the future, according to sources, the annual interest rate of 2.5 per cent for gold bonds on initial investment price will be subject to review and brought in line with the market trend, like other government-sponsored saving schemes.
The taxation treatment for bonds has also been changed. According to the government announcement, "The interest on Gold Bonds shall be taxable as per the provision of Income Tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond."
While several features of ETFs will be available in bonds now, the liquidity in ETF is much better than that of gold bonds. Therefore, stock exchanges will have to work more for improving liquidity in gold bonds.