The Indian government is planning to come out with sovereign bonds linked to the price of gold in an effort to reduce import of the precious metal. India consumes nearly 1,000 tonnes of gold every year, most of it imported, and gold remains the second-biggest expense on its import bill after oil.
The government aims to issue bonds worth Rs13.5 billion or the equivalent of 50 tonnes of gold in the first year. The draft outline for discussion purposes only was issued on June 18 and the Finance Ministry has invited the public to comment on the proposals by July 2.
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 would provide an alternative to purchasing physical gold.
The maturity of the bond could be for a minimum of 5 to 7 years and, on maturity, the investor will get the market value of the gold. If the value of gold goes up, investors will gain. If the value of gold goes down, they will suffer a loss.
The bonds will be easily sold, traded on commodity exchanges, to offer an exit route to investors before maturity and can also be used as collateral on loans. The bonds are likely to be issued in denominations of 2, 5, 10 grams of gold or other denominations. The bonds would however be restricted for sale to resident Indian entities.
The proposed tax treatment for gold bonds will be the same as that of physical gold or gold exchange traded funds (gold ETFs). When you sell physical gold or gold ETFs, you have to pay tax on capital gain at 20 percent with indexation if held for long term (36 months or more).
Investors of gold bars or coins may find gold sovereign bonds a better investment than holding a physical stock. Bonds will also relieve investors of the need to check the quality of gold which is a major hurdle when purchasing from local jewelers.
Gold sovereign bonds may triumph over other comparable products in the market such as gold exchange traded funds which don't pay interest.