I read that exchange will allow trading of sovereign gold bonds from 13th June. What do these bonds actually mean? How is the price calculated? What is the underlying?
Also what is better, buying Gold ETF’s/Mutual funds or Gold sovereign bonds.
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you can check the below tradingqna question , explained clearly about sovereign gold bonds
http://tradingqna.com/23868/more-details-of-sovereign-gold-bond-schemes?show=23868#q23868
In simple words, government sovereign gold bond scheme is where instead of having physical gold sitting idle in your house, you can invest in gold bonds.
These gold bonds are in demat form, and unlike physical gold gives you an interest of 2.75% annually additional to whatever appreciation happens on the underlying gold value. This interest payment is half yearly on 30th May and 30th Nov.
What happens if gold value drops?
If it drops, your value of gold bond also drops. It is the same way like the value of your gold jewellery also drops if gold prices come down.
The first tranche of sovereign gold bonds that were issued Nov 2015, is available for trading from June 13,2016 .
What this means is that you can now invest into them on the exchanges. So from June 13th, you and me can also buy these bonds from the market like we buy stocks.
These bonds will give you an additional 2.75% interest for the holders, so it definitely makes better sense to buy compared to gold ETF's/MF's. Also these bonds are backed by the government, so there is sovereign guarantee.
It is important to note though that the gold bond prices on the exchange will be including the dirty price. Dirty price is essentially the accrued interest. The day interest is paid out by the government, the value of the bond will reduce by that amount (similar to how dividends work on stocks).
Let me try to explain dirty price in layman language, Assume you bought a bond at Rs 1000, with fixed interest of 12%. At the end of 1 month there is 1% interest accumulated, so the value of bond will automatically become 1010 (1% of 1000). If the interest is paid out monthly, as soon as the bond pays off this Rs 10 interest, the value of bond will drop by Rs 10 and go back to Rs 1000. So this Rs 10, which was the accrued interest is called the dirty price.
Now it is to be seen if trading in gold bonds become popular on the exchange or not. It may not make sense to participate if the bid/ask spreads are too big.
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Dear Nithin,
Will They pay interest 2.75% on face value( Rs 2684) or Market value of gold ? The money will deposite in Bank account or Trading account ?
What we will get (Money or Gold) on redempion ? Which gold price they consider I mean MCX or other ? Please reply.
Interest on face value. Redemption will be on the value of gold in the spot market.
Sir,
I learned that sovereign gold bond will nature at 24 carat gold rate but why it was trading at 10% discount from current market price .
Is that means i earn directly 10% when I buy from market ?
This might be due to dividend payout.
No such dividend has been given
I have question related to taxation on bonds purchased from secondary market. I plan to buy bonds from market and on maturity the government redeems the equivalent amount into my account. How will I be taxed for bonds which are held for 1 year, less than 3 years and more than 3 years.
Thanks in advance.
@nithin , @Quicko , please reply on above.
As per my knowledge, on redemption it’s tax free, that means there is no tax, irrespective of holding period, am I correct?
There’s some confusion over whether capital gains exemption will apply even for bonds bought in the Secondary market. We’re trying to get some clarity on this, will update this thread as and when we do.
Somebody has already posted a clarification email from RBI on this forum citing that the exemption is valid even for units bought in secondary markets…
Is there any clarity about this yet? I had seen some email replies from RBI which suggested that exemption would be applicable on secondary market purchases as well but upon re-reading them, I noticed they were similar to what is already written in the Tax Treatment section of Press releases of SGB Scheme
I asked this because I recently saw an article, where the following was mentioned -
Will an investor get the same benefits on SGB if purchased directly and in case buying it from the secondary markets?
“Investors will not get the same benefits from the secondary market as compared to direct purchase since they will not get the 2.5 per cent interest per annum and will not be exempt from capital gains. However, in the secondary markets it can be purchased on a discount on a falling gold price scenario,” said Ravi.
The part about not getting interest seems to be incorrect/misquoted but the part about non-exemption from capital gains is what piqued my curiosity
Think about it like a bank note, which it essentially is. When you take it out from the Bank, its yours. It doesn’t matter who you sell it to or how many times you sell it. In the end, the person who has it will be the owner of this note and when he deposits it in his account, he will get what the note promises to do.
There is taxation involved in transacting the bond on secondary market, but in the end, the bearer will get capital gains tax exemption.
Your example is not clear. Bond of Rs 1000 is ok but what is fixed interest at 12%?
I have invested in SGB on Kite Zerodha. I am getting interest deposited directly into the bank and it’s tax-Free.
As you see, no reply since you asked question 2 years back. The correct answer would be from your CA or advisor because he has your file and a normal user I don’t know in which IT returns slab you currently fall.
Hi @teenscm
For SGBs,
Taxation on Interest Income:
It will be treated as Income from other Sources and will be taxed to the investor as per the applicable tax rate.
For eg: If an investor falls under the 30% Income range, he will be taxed at 30% and if the investor’s income range attracts 10%, it will be taxed accordingly.
Capital Gains:
-
If held till maturity : Tax exemption
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If held for more than 3 years: LTCG of 20% with Indexation or 10% without indexation is applicable
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If held for less than 3 years : STCG is applicable at slab rates.
The biggest advantage with SGBs is: If you hold the SGBs till the maturity, The capital gains (if any) are exempted from tax.
Here’s @Quicko article on taxation related to SGBs
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Interest recd on your SGBs will be taxable at applicable slab rates.
Fixed interest given by the bond issuers to the bond holder. in case of SGBs, currently govt gives 2.5% fixed interest to its holders.
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