Why Should You Invest in Gold Bond Schemes?

Gold is one of the favorite investments, especially in India. From festive occasions to auspicious ceremonies, we always find ways to acquire gold. With the technology change, most investments have become digitized. Innovative and technology-driven modes of investing in gold have also started gaining popularity. In this line, the Government of India issues gold bond investment schemes every year.

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You must be wondering what kind of returns can you expect from gold investments? Don’t worry! This article covers all that you need to know about the gold bond scheme.

What is the Gold Bond Scheme?

The Government of India issues gold bonds to raise money against the purchase of these gold-based instruments. The idea is to encourage financial investment in gold rather than actual physical ownership.

The following points highlight the mechanism of the gold bond scheme and how it works.

Pricing of a Gold Bond

The Indian Bullion and Jewelers Association publishes closing prices of gold in INR for each trading day. The gold bonds are priced at the average closing rate of 999 purity gold during the last 3 working days before the subscription period. This price is quoted per gram of gold.

The prices for October 2021 are fixed at Rs. 4,765/- per gram.

(Note: 999 purity gold is the purest form of gold or 24 Carats. 999 refers to the volume of gold content that is 99.9%).
When are Gold Bonds Issued?

Gold bonds are issued in tranches. Each tranche is open for subscription for less than a week. During this time, you can apply to purchase gold bonds either offline or online.

On average, gold bonds are issued once every couple of months. Although, it is not fixed. It depends on the government and RBI’s decision. For example, the gold bond scheme for the remaining period of 2021-22 is being divided into 4 trances between October 2021 to March 2022.
Is there a Limit on Gold Bond Investment?

Each gold bond security is equivalent to 1 gram of gold. You must purchase a minimum investment of 1 gram. The maximum amount of gold bonds you can purchase as an individual or a HUF is 4 kg per fiscal year. On the other hand, a trust can buy a maximum of 20 kg worth of gold bonds.
Should You Purchase Gold Bonds Offline or Online?

To promote online transactions and digital subscriptions of the scheme, RBI provides a flat discount of Rs. 50 per gram on the bond prices for people who apply and pay online. You can purchase a gram worth of gold bond for Rs. 4,715/-.

Moreover, it is easier to apply online and there is no restriction on the amount you can pay. On the other hand, the maximum amount you can pay in cash or offline is Rs. 20,000. Hence, it is beneficial for you to apply for the gold bond scheme online.
What is the Tenure of Investment?

You can purchase and hold the gold bonds under the gold bond investment scheme for a maximum period of 8 years. Although, there is a minimum lock-in period of 5 years. You can exit the scheme from the next interest payment date after the completion of 5 years.

Benefits of Investing in the Gold Bond Scheme

Any discussion about investment is incomplete without discussing the returns and other benefits that you can get from the scheme. Here are the benefits & advantages that you can derive from your gold bond investment.

Fixed Rate of Return

You earn a fixed interest rate of 2.50% per annum on these sovereign gold bonds. The interest payout is made every 6 months. Since the scheme is guaranteed by the Government of India, it is one of the secure investment opportunities for you.
Easily Tradable

You can easily trade the sovereign gold bonds issued under the gold bond scheme in the secondary markets. Usually, RBI issues a notice to allow the public trading of these instruments around a couple of weeks after the subscription date.

For trading the bonds in secondary markets, you need a Demat account where you can hold the virtual security certificates. The market price of these bonds is based on the rate of gold prevailing in the markets plus the effect of demand and supply.
Secured Instruments Carry Lower Risk

Instruments or securities that are underwritten by the government of a country are called Sovereign instruments. The Sovereign Gold Bonds are named so because of the security provided by the Government of India.

You cannot lose your investment in these gold bonds. This is the most attractive feature of these instruments. If you prioritize the safety of your investments, you must consider investing in the gold bond scheme.
Higher Redemption Value Due to Gold Price Appreciation

The prices of gold have seen a consistent rise over the decades due to its increased demand. The bonds issued under the gold bond scheme are redeemed at the market prices during redemption.

This helps you earn capital appreciation throughout holding the securities. Alternatively, you can opt to resell the gold bonds in the stock market at the prevailing market prices to book profits.
You Can Save the Making Charges and GST

While purchasing physical or gold, you have to pay the GST charges on each transaction and making charges for each piece of jewelry. You can save both these expenses and reduce your cost of purchasing gold by making a gold bond investment.
Easy Loan Approval with Gold Bonds as Collateral

You can easily obtain loans from any financial institution against the collateral security of the Sovereign Gold Bonds. Lenders can easily advance up to 75% of the market value of these gold bonds at reasonable interest rates. This can help you meet liquidity crises while you keep earning from the investment.

Taxation of Gold Bond Investment

It is possible to rightly analyze an investment opportunity only after considering your tax liability on the returns. You can categorize the returns from a gold bond scheme into 3 categories, namely:

Regular Interest Payouts
Capital Gains on Redemption of the Bonds
Capital Gains on resale of Bonds in Secondary Market

Particulars	Regular Interest Payouts	Cap. Gains on Redemption	Cap. Gains on Resale
Tax on Income	As per the applicable Slab Rates	NA	NA
Short Term Capital Gains (Before Completion of 3 years)	NA	NA	As per the applicable Slab Rates
Long Term Capital Gains after 3 years	NA	Exempt from Taxes	Taxed @ 20% after deducting the indexed cost of purchase

Final Thoughts

A gold bond scheme is one of the safest investment options that you can purchase. Being backed by the government and having the precious yellow metal at the base makes it a must-buy.

Although you can probably earn huge profits throughout your investment tenure in gold bonds against price fluctuations. No investment opportunity can promise a risk-free return. Hence, you should check your investment preferences and the scheme details before applying for gold bond investment.

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^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

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