Sovereign Gold Bonds Coming Soon: 10 Facts

The government is planning to come out with sovereign bonds linked to the price of gold in an effort to reduce import of the precious metal. India consumes nearly 1,000 tonnes of gold every year, most of it imported, and gold is the second-biggest expense on its import bill after oil. The draft outline (for discussion purposes only) was issued on June 18 and the Finance Ministry has invited the public to comment on the proposals by July 2.

Here is a 10-point cheat-sheet:

1) Sovereign gold bonds are papers or certificates issued by the government saying that investors bought a certain amount of gold. The value of the bond will be linked to the price of gold. The bonds would provide an alternative to purchasing physical gold.

2) The bonds would pay an interest rate linked to the international rate for gold borrowing. "An indicative lower limit of 2 per cent may be given but the actual rate will have to be market-determined," the proposal said.

3) On maturity of the bond, the investor will get the market value of the gold. If the value of gold goes up, investors will gain. If the value of gold goes down, they will suffer a loss.

4) The maturity of the bond could be for a minimum of 5 to 7 years. The bonds will be easily sold, traded on commodity exchanges, to offer an exit route to investors before maturity.

5) The bonds will be issued in denominations of 2, 5, 10 grams of gold or other denominations. The bonds would however be restricted for sale to resident Indian entities.

6) The gold bonds can also be used as collateral for loans.

7) Taxation: The proposed tax treatment for gold bonds will be the same as that of physical gold or gold exchange traded funds (gold ETFs). When you sell physical gold or gold ETFs, you have to pay tax on capital gain at 20 per cent with indexation if held for long term (36 months or more). If the holding period is less than 36 months, the gains will be taxed as per your tax slab. (Indexation is a process by which the cost of acquisition is adjusted against inflation in the value of asset.)

8) Though the scheme details have not been finalised, analysts have supported the framework of the scheme. Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock, believes ratings agency India Ratings.

9) Gold bonds will relieve investors of the need to check the quality of gold which is a major hurdle when purchasing from local jewelers, says India Ratings. "Retail investors often use the gold deposit schemes run by local jewelers and thus run a counterparty risk. In case of a gold bond, the counterparty is the government of India, adds India Ratings.

Gold sovereign bonds may triumph over other comparable products in the market such as gold exchange traded funds which don't pay interest, India Ratings says.

10) The government aims to issue bonds worth Rs 13,500 crore or the equivalent of 50 tonnes of gold in the first year.