Gold bonds coming, Will it be a better deal for you

The government will be issuing bonds worth Rs 13,500 crore ($2.12 billion) or the equivalent of 50 tonnes of gold in the first year.

June 24, 2015 10:19 IST | India Infoline News Service
Finally, the sovereign gold bonds as promised by the finance minister in the Union Budget are going to be a reality soon. The finance minister last week issued draft guidelines for these bonds, which say these bonds will carry a sovereign guarantee and offer a minimum interest rate of 2 per cent.
The government will be issuing bonds worth Rs 13,500 crore ($2.12 billion) or the equivalent of 50 tonnes of gold in the first year. One estimate shows if this entire issuace is subscribed to in the first year, it will represent 27 per cent of total investment demand in 2014 and result in a saving of $2 billion on gold imports at current prices. The Reserve Bank of India will issue these bonds on behalf of the government.
The gold bonds will have tenures of five to seven years, will be available in denominations of 2, 5, 10 gm of gold and will require the same KYC norms as in the case of gold. At the end of the tenure, the investor will receive an amount equivalent to the face value of the gold in rupee terms. The bullion-linked bond will attract capital gain tax as in the case of physical gold.
With this scheme, the government aims to prune the estimated 300 tonne of bars and coins purchased by citizens every year. Physical gold imports have always been a huge burden on the government exchequer, being the second-biggest expense on the import bill after oil.

Indian consumers buy nearly 1,000 tonnes of gold every year, most of which is imported. The government has been consistently trying to reduce it first by putting curbs on gold imports and now by offering alternative means of investment to gold investors.
The gold bond price will be linked to gold price and it would pay an interest rate linked to the international rate for gold borrowing. Indians prize gold as gifts and as a way of storing wealth.
Recently, the government also unveiled a gold deposit scheme, which is aimed at mobilising idle household gold, estimated at more than 20,000 tonnes.
The new bond scheme, on the other hand, would allow consumers to invest in 'paper' gold rather than physical gold. The scheme is expected to wean away investors of the existing gold ETFs of mutual fund industry, as the new bond offers a sovereign guarantee, which is a big plus plus.

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