November 28th 2023.
Sovereign Gold Bonds (SGBs) were introduced by the Union government eight years ago and have been sold through the Reserve Bank of India (RBI) periodically ever since. A total of 62 tranches have been sold so far. As each bond has a life of eight years, the bonds from the first tranche have now reached their end of life and must be redeemed for cash. The government will accept the return of the bond and deposit the cash in the investor's account.
The value of each bond can range from as small as ₹5000 to a few crores. These bonds offer several advantages, such as being in demat form with no need to physically hold any paper, and representing actual units of gold. When redeemed, it is like redeeming physical gold, allowing the investor to benefit from the price escalation of gold.
The gold price can rise due to a number of reasons, including international speculators and bullion investors buying it as a safe haven instrument, and the rupee-dollar exchange rate depreciating. Additionally, the bonds can be pledged as collateral for a loan and capital gains made on the sale of the bond are exempt from taxes. The investor also receives a 2.5% interest rate from the government.
Investors from the first tranche who redeem their gold bonds will realise a post-tax gain of more than 12% per annum over the last eight years. This is because the price of gold has more than doubled from ₹2684 per gram in November 2015 to around ₹6000 now, and the rupee-dollar rate has gone down from 62 to 82, a fall of 33%. Compared to the stock market returns of around 13.8% per year over the same period, gold has delivered a handsome return of 12% on a post-tax basis.
The gold bond scheme was introduced to reduce India's insatiable appetite for gold, which leads to billions of dollars of foreign exchange being spent each year on imports. Despite the government's efforts, the scheme has not been successful in deterring gold imports, and the outflow of foreign exchange is still significant.
The government needs to make the bond scheme more attractive to small investors and advertise the benefits of demat gold more aggressively. Other measures, such as introducing gold-backed exchange traded funds, reducing the borrowing cost, and introducing schemes to dematerialise gold can also be taken to make the gold bond scheme more successful.
The introduction of electoral bonds in recent years has also led to a lot of debate over the transparency of political party funding. Without the disclosure of who contributes to these bonds, there is a risk of opaque funding which can have a long-term adverse effect on the democratic process. We need to know if these bonds truly promote transparency or are just a veil over the actual source of funding.
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