The government of India has approved the sovereign gold bond scheme. Sovereign gold bonds are certificates issued by the government saying that investors bought a certain amount of gold.
The value of the bond will be linked to the price of gold and in other words it provides an alternative to purchasing gold.
In the first installment the government has proposed that it would issue bonds to the tune of around 13,500 crore. This is almost equal to 50 tonnes of gold.
The scheme aims at reducing the import of gold. Out of the 1,000 tonnes of gold consumed every year, most of it is imported. Gold is the second highest expense on the import bill after oil.
What are sovereign gold bonds?
The bonds would also pay an interest rate linked to the international rate of gold borrowing. Once the bond matures, the investor will get the value of the gold as per the market price.
These bonds could be invested for a period of 5 to 7 years and can be sold as it offers an exit route to the investor of the bond.
The government has proposes that the bonds will be issued in the denominations of 2, 5 and 10 grams. Other denominations are expected to be available too.
Taxation and benefits
The tax on the gold bonds would be similar to that of physical gold. It can be used as a collateral for loans. This is available only for resident Indians. The authenticity factor is what is most beneficial in this scheme.
A person investing in the bond would not have to worry about the quality of the gold like in the case when he or she purchases it from the jeweler. In the case of this bond the counterparty is the government of India.