Today Government of India (GOI) announced opening of second tranche of Sovereign Gold Bond issue.The issue is open for subscription till January 22.We got a query for should one look at investing in this scheme? Here is our quick take on the scheme.
This is one of the Schemes which GOI wants to promote to help curtail the Current account deficit on account causing on account of Gold import. Our lush for yellow metal is costing high exchequer, so emphasis is given more to hold the paper gold.
Advantages:
- This is a good option than buying Physical gold.
- One can avail loan on these bonds.
- Better than Gold ETF.
- There is no annual fees
- Backed by Government of India
Disadvantages:
- Lock-in of 8 years. After 5 years one can exit only on the specific dates. i.e. Interest Payment dates only.
- Interest of 2.75% is payable. This interest is far low to beat the inflation.
- Interest earned is taxable. So if you are in the 30% tax slab, you then earn only 1.9% post tax which is extremely low.
- At the time of maturity, you will receive cash and NOT gold. Money is equivalent to market value of Gold. The price is based on the average price on the previous week.
- If gold prices go down, loss is yours.
- In case there is capital appreciation over the period of 5 years or 8 years, then the capital gains is taxable at 20% with indexation.
Conculsion:
We feel given the higher lock in of 8 years, it is difficult to predict gold prices. With US Dollar being strong after 2008 crash, gold prices will be flat or bearish for longer periods unless there is another financial crisis. Moreover why earn so little interest and pay tax on interest for buying a commodity for which one is expecting the prices to move up later.
If the objective is to buy gold on later date for wedding or investment, We would advise to invest in any other debt instrument and earn better post tax return and buy gold at your time whenever needed than wait for the specific dates.