The Sovereign Gold Bond has for long been a tax-efficient way for investors to take exposure to gold. Besides being one of the best performing asset classes in recent years, gold allows individuals to diversify their investment portfolios beyond the traditional equity and fixed income investments.
The first Sovereign Gold Bond issue of the new financial year is now open for subscription from June 19 to June 23. There are several factors that make this particular issue attractive.
Gold Prices
The price of gold has been on an upswing in the last year and if one looks at the international prices, the return has been around 6%, while the return on Indian gold has been 16%. This higher return locally is due to the depreciation of the rupee against the dollar over the last one year. Analysts and market watchers have been looking at gold as a safe haven due to the recession risk in the U.S. and Europe and the slow economic recovery in China.
In addition, the current pause and the eventual rate cuts by the Federal Reserve in the U.S. is expected to boost the price of gold. There has been a rise in interest from investors to shore up their gold exposure but since the start of the financial year there has been no new issue of the Sovereign Gold bonds, which made a lot of them wait for one to come.
This wait has also come as a boon for them in terms of prices as these have retreated slightly from recent highs. This is reflected in the price of the latest Sovereign Gold Bond issue, which has been fixed at Rs 5,926 per gram with a discount of Rs 50 for investors who invest online and use a digital mode of payment.
New Issue Benefits
There is a big benefit for investors when they invest through a new Sovereign Gold bond issue as opposed to buying the bonds through the secondary markets. While liquidity and pricing in the secondary markets are the normal risks to contend with, it is the tax angle that is significant. An investor who buys the bond during the issue and then holds it till maturity will get the benefit of no tax liability on capital gains earned during the duration of the holding period.
In other words, any potential earnings during the eight years of the bond becomes tax free in the hands of the investor. This gain can be significant and, as a result, the tax saving can also be high. This makes it a great proposition for those with a requirement for deploying funds for a longer time horizon.
Additional Benefits
There is also one extra benefit that investors in Sovereign Gold Bonds receive. This is an annual interest of 2.5% on the bonds. This is an extra income that no other investment in gold provides. This income is taxable at the slab rate, but it adds to the overall return of the investor.
The final factor to bear in mind is the change in the nature of taxation on gold mutual funds and gold exchange traded funds. Starting April this year, any mutual fund scheme with less than 25% invested in equity does not have long-term capital gains. Rather, any return generated from these schemes is classified as short-term capital gains and is taxed at the slab rate. This makes the tax treatment of the Sovereign Gold Bond even more attractive.
Arnav Pandya is Founder - Moneyeduschool
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.
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