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Union Ministry of Finance released Draft Outline of Sovereign Gold Bond Scheme

Jun 20, 2015 13:00 IST

The Union Government on 19 June 2015 released the Draft Outline of Sovereign Gold Bond Scheme. The government invited comments till 2 July 2015 on it.

The scheme is aimed at reducing the demand for physical gold and to shift part of the estimated 300 tons of physical bars and coins purchased every year for investment into demat gold bonds.

Features of Sovereign Gold Bond Scheme

• Bonds will be issued on payment of money and would be linked to the price of gold.
• The sell would be restricted to resident Indian entities and each entity cannot buy more than 500 grams per person per year.
• The bonds will be issued in denominations of 2, 5 and 10 grams of gold or other denominations.

• The bonds will be issued with a nominal rate of interest (which will be linked to international rate for gold borrowing).
• The rate of interest on the bonds will be payable in terms of grams of gold. The interest will be calculated on 10000 at a certain per cent say 2 or 3 percent.
On maturity, the investor receives the equivalent of the face value of gold in rupee terms.
• Bonds will be issued on behalf of the Government of India by the Reserve Bank of India (RBI).
• The bond will be marketed through post offices and by various brokers/agents who may need to be paid a commission (like for Kisan Vikas Patra).
• The price of gold may be taken from National Commodity and Derivatives Exchange (NCDEX) / London Bullion Market Association/RBI and the rupee equivalent amount may be converted at the RBI reference rate on issue and redemption.
• Banks/ Non-bank financial companies (NBFCs)/Post Offices may collect money / redeem bonds on behalf of government (for a fee, the amount would be as decided).
• Capital gains tax treatment will be the same as for physical gold. This will ensure that an investor is indifferent in terms of investing in these bonds and in physical gold- as far as the tax treatment is concerned.
• The tenor of the bond could be for a minimum of 5 to 7 years so that it would protect investors from medium term volatility in the gold prices.
• These Bonds will be easily sold and traded on commodity exchanges
• Bonds can be used as collateral for loans. The Loan to Value ratio can be set equal to ordinary gold loan mandated by RBI from time to time.
During 2015-16 financial year gold bonds equivalent of 50 tonnes of gold would be issued. Since the amount, around 13500 crore rupees, is not very high, it can be accommodated within the market borrowing programme for 2015-16.
• Since these bonds are part of the sovereign borrowing, these would need to be within the fiscal deficit target for 2015-16 and onwards.

Comment

The announcement of Draft Outline of Sovereign Gold Bond Scheme is in tune with the Union Finance Minister Arun Jaitley’s 2015-16 budget speech.

Jaitley, on 28 Februay 2015, announced three major initiatives viz., Gold Monetisation Scheme, Sovereign Gold Bond Scheme and Indian Gold Coin to curb demand for physical gold there by reducing dependence on gold imports.

Gold Monetisation Scheme (GMS), for which the draft outline was released on 19 June 2015, is intended to replace both the gold deposit and gold metal loan scheme and to allow depositors to earn interest on their gold metal accounts jewelers to obtain loans.

Indian Gold Coin, which will carry the Ashok Chakra on its face, would help reduce the demand for gold coins and also help recycle the gold available in the country.

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