All about Sovereign Gold Bond Scheme 2020-21

Sovereign Gold Bond Scheme 2020-21: Taxmann’s Editorial Team Analysis

Sovereign Gold Bonds (SGBs) are government securities, which are denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash, and the bonds will be redeemed in cash on maturity. Reserve Bank of India issues the bond on behalf of the Government of India.

The quantity of gold for which the investor pays is protected, as the investor receives the market price of gold on redemption. The SGB offers a superior alternative to holding gold in physical form.

The risks and costs of storage are eliminated. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewelry form. The bonds are held in the books of the RBI or in Demat form eliminating the risk of loss of scrip, etc.

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Sovereign Gold Bonds with Quick Tips & Comparison Table of SGB/Physical Gold & ETF

1. Who can Invest in the Sovereign Gold Bond Scheme?

The Sovereign Gold Bonds[1]may be held by a Trust, HUFs, Charitable Institution, University or by a person resident in India, being an individual, in his capacity as such individual, or on behalf of a minor child, or jointly with any other individual. . An individual investor whose residential status subsequently changes from resident to non-resident may continue to hold SGB till the original term of redemption/maturity.

1.1 Meaning of Person resident in India 

The expression “person resident in India” shall have the same meaning as defined in Section 2(v) of the Foreign Exchange Management Act, 1999

1.2 Meaning of Trust

Trust means a trust constituted or formed as per the Indian Trusts Act, 1882, or a public or private trust constituted or recognized under the provisions of any Central or State law for the time being in force and also an express or constructive trust constituted for either a public religious or charitable purpose or both which includes a temple, math, a wakf, a church, a synagogue, anagiary or any other place of public religious worship, or a dharmada or any other religious or charitable endowment and also society, formed either for a religious or charitable purpose or for both, registered under the Societies Registration Act, 1860 or under any other law for the time being in force in India

1.3 Meaning of Charitable Institution

Charitable Institution means a Company registered under Section 25 of the Indian Companies Act, 1956 or under Section 8 of the Companies Act, 2013; or an institution, which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force; or Any institution which has obtained a certificate from an Income Tax Authority for the purposes of Section 80G of the Income Tax Act, 1961.

1.4 Meaning of University

University means a university established or incorporated by a Central, State or Provincial Act, and includes an institution declared under section 3 of the University Grants Commission Act, 1956, to be a university for the purposes of the Act.

2. Sovereign Gold Bond Interest Rate

21. Limit of Investment

The Bonds are issued in denominations of one gram of gold and multiples thereof. The minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF), and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).

In the case of joint holding, the limit applies to the first applicant. The annual ceiling will include bonds subscribed under different tranches during initial issuance by Government and those purchased from the secondary market.

The limit on investment will not include the holdings as collateral by banks and other Financial Institutions.

2.2 Price of Bond

The nominal value of Gold Bonds shall be in Indian Rupees fixed on the basis of a simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewelers Association Limited, for the last 3 business days of the week preceding the subscription period.

The issue price of the Gold Bonds will be Rs 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.

2.3 Application for Subscription

Application for subscription to sovereign gold bonds shall be made in Form A or in any other form as near as thereto, stating clearly the grams of gold, full name, and address of the applicants. The application shall contain documents and particulars as specified in the instruction contained in the application form, such as the original birth certificate from the School or Municipal Authorities for verification, together with an attested copy, in case the application is on behalf of a minor.

Further, the application must be accompanied by the PAN number.

On receipt of the application, the receiving officer shall issue an acknowledgment in Form B subject to fulfillment of all the requirements. An incomplete application shall be liable to be rejected. The gold bonds shall be issued in form of a stock certificate in Form C and it shall be eligible to be converted into Demat form.

2.4 Period of Subscription

The subscription of these bonds shall be open as follows subject to the condition that the Central government may close the scheme at any time before the specified period [2]:

2.5 Maturity

The gold bonds will mature on the expiration of 8 years from the date of issue of the bonds. On maturity, the Gold Bonds shall be redeemed in Indian Rupees, and the redemption price shall be based on the simple average of the closing price of gold of 999 purity of previous three working days, published by the India Bullion and Jewelers Association Limited.

Both interest and redemption proceeds will be credited to the bank account furnished by the customer at the time of buying the bond. The date of maturity of the bond shall be informed by the RBI/depository one month in advance.

2.6 Premature redemption

Though the tenor of the bond is 8 years, early encashment/redemption of the Bond is allowed after the fifth year from the date of issue of the bonds. Repayment of such early encashment/redemption will be made on the next interest payment date. The bond will be tradable on Exchanges if held in Demat form. It can also be transferred to any other eligible investor.

2.7 Collateral for loans

The Gold Bonds may be used as collateral security for loans from banks, financial Institutions, and Non-Banking Financial Companies (NBFC). The Loan to Value ratio will be the same as applicable to conventional gold loan prescribed by the RBI from time to time. Granting loan against SGBs would be subject to the decision of the bank/financing agency, and cannot be inferred as a matter of right. 

3. Tax Implications on SGBs

3.1 Interest Income 

The interest received on the sovereign gold bond shall be chargeable to tax under the head of other sources and taxed as per the tax rates applicable in case of an assessee. However, any payment of interest on SGBs would not attract any TDS as they are Government Securities. Thus, investors would receive the full amount of interest on SGBs in their bank accounts.

3.2 Capital gain on redemption

SGBs have a tenor of 8 years. However, investors can go for pre-mature redemption of SGBs after the fifth year from the date of the issue. The redemption of the SGBs is treated as transfer, thus, charged to capital gains tax. However, Section 47 of the Income-tax Act provides an exemption for such capital gain arising on the redemption (including pre-mature redemption) of SGBs to an individual investor.

Any capital gains arising to an investor other than Individual on the redemption of SGBs (whether on maturity or pre-mature redemption) shall be taxable as a long-term capital gain. As SGBs are listed on stock exchanges in India, the investor has an option to compute the capital gain with or without taking the benefit of indexation.

If the benefit of indexation is taken, then tax shall be charged at the rate of 20% otherwise at the rate of 10%.

3.3 Capital gain on transfer

Sovereign Gold Bonds are listed on stock exchanges in India. Thus, a person can transfer the SGBs in the secondary market. The profit or loss arising on the transfer of SGBs shall be chargeable to tax under the head capital gain. If the SGBs are transferred after holding for more than 12 months, the resultant gains shall be taxable as a long-term capital gain. Whereas, if the SGBs are transferred within 12 months then the gains shall be treated as a short-term capital gain.

Short-term capital gain arising on transfer of SGBs is charged to tax at normal tax rates as applicable in case of an assessee. Long-term capital gain is charged to tax at the rate of 20% if the benefit of indexation is taken while computing capital gain otherwise tax is charged at the rate of 10%.

The taxability shall remain the same in case of off-market transactions. Further, it is to be noted that even an individual shall be liable to pay tax on capital gains arising on transfer of SGBs as exemption has been provided only in case of redemption and not on transfer of SGBs.

3.4 Indexation of cost of acquisition of SGBs 

In the case of the transfer of a long-term capital asset, the cost of acquisition of the capital asset is adjusted to reduce the impact of indexation. Such adjustment in the cost is called the indexed cost of acquisition which is calculated in a two-step process. The first step is to calculate the cost of acquisition of the capital assets.

In the second step, such cost of acquisition is multiplied with the CII of the year in which capital asset is transferred and divided by CII of the year in which asset is first held by the assessee or CII of 2001-02, whichever is later.

The scheme of indexation does not apply to any transfer of a bond or debenture. Thus, even if the bond or debenture is a long-term capital asset, the deduction is allowed only for the simple cost of such bonds or debenture. However, Capital Indexed Bonds issued by the Government and Sovereign Gold Bond issued by RBI under the Sovereign Gold Bond Scheme are exceptions for this. The indexation scheme remains applicable to such bonds.           

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[1] Sovereign Gold Bond Scheme 2020-21 notified vide Notification No. GSR 250(E), dated 13-04-2020 

[2]Circular No. RBI/2020-2021/52 IDMD.CDD.No.730/14.04.050/2020-21, dated 09-10-2020