Sovereign Gold Bond Scheme

Context: The Union government is considering discontinuing the sovereign gold bond scheme due to the high cost of financing the scheme. The recent developments like reduction of import duty on gold in the Union budget 2024-25, have raised the questions over the effectiveness of the SGB scheme. 

Relevance of the Topic: Prelims: Features of Sovereign Gold Bonds. 

What are Sovereign Gold Bonds (SGBs)?

• Definition: SGBs are government securities (debt securities) 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. The Bond is issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
• Key Features:
  • Denomination: One gram of gold and in multiples thereof. 
  • Minimum investment: One gram with a maximum limit of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government. 
  • Interest rate: 2.50 per cent (fixed rate) per annum on the amount of initial investment. 
  • Maturity Period: 8 years 
  • Lock-in Period: 5 years 
• The money raised through SGBs is counted as part of Fiscal Deficit. 

Rationale of Sovereign Gold Bonds scheme:

• To encourage citizens to invest in gold bonds. This would reduce the demand of physical gold and thus reduce gold imports. (Gold imports are a significant contributor to India’s trade deficit).
• To shift a part of the domestic savings used for the purchase of physical gold into financial savings.  
• To bring the idle gold lying with Indian households into the economy. 

Who can invest in the SGBs?

• Persons resident in India as defined under Foreign Exchange Management Act, 1999.
• Eligible investors include individuals, HUFs, trusts, universities and charitable institutions.

Who are the authorised agencies to sell SGBs?

Bonds are sold through offices or branches of:

• Nationalised Banks
• Scheduled Private Banks
• Scheduled Foreign Banks
• Designated Post Offices
• Stock Holding Corporation of India Ltd.
• Authorised stock exchanges

Benefits of Sovereign Gold Bonds:

• Alternative to Physical Gold: SGB offers a superior alternative to holding gold in physical form. The risks and costs of storage are eliminated. 
• Interest Earnings: Investors earn an interest of 2.5% per annum which is payable semi-annually on the investments.
• Market-Linked Returns: The redemption price is linked to the prevailing gold market price which ensures the gains from price appreciation.
• Loan Facility: SGBs can be used as collateral for loans as it offers financial flexibility.
• Liquidity: It also provides the option for premature redemption from the fifth year as well as tradability on stock exchanges.
• Tax benefits: SGBs are taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax on redemption of SGB to an individual has been exempted. 

Challenges and Concerns with SGBs:

• High Financing Costs: There are concerns that the cost of financing the fiscal deficit through SGBs is quite high and does not align with the benefits accruing to investors from the scheme.
• Reduced SGB Value: The government in Budget 2024-25 has reduced the gold import duty from 15% to 6%. As the price of gold has decreased due to lower import duty, the value of SGBs, which are linked to gold prices, has also declined. This has made SGB less attractive. 
• Reduced Demand of SGB: Due to diminishing demand for SGB, the government has reduced the number of SGB issuances from 10 tranches per year to just two. In the current fiscal year (2024-25), no issuance of SBG has taken place so far.
• Limited Tax Base: Despite the government's efforts to reduce physical gold holdings, there has been limited success in expanding the investor base for gold bonds.