Arrival of Mr.Gold BOND!
After a number of measures taken to convert the investment in physical gold to paper gold, the government may have at last found the secret formula by introducing the Gold BOND scheme this week. Let us look at the interesting developments behind the arrival of Mr Gold Bond!
The Problem
The fundamental problem being addressed here is in ensuring that the Indians' love for the yellow metal does not damage the broader economy. How so? Indians' insatiable thirst for gold leads to huge imports (842 tons in 2014) every year leading to a spike in India's import bill. Gold forms 12% of our total imports. This causes a huge trade deficit, which in turn causes serious repercussions in the economy such as unstable macro climate, low sovereign rating, higher borrowing rates, currency fluctuations, capital outflow from stocks, bonds, rise in interest rate & inflation and lastly lower employment.
Since 2013, the government has taken a number of measures ranging from curbing of imports by levying extra taxes to imposing import quotas for jewelers and had even attempted to monetize the stock of physical gold in the country through the recent gold monetization scheme. While the two former policies helped to bring down gold imports to a certain extent, it also gave rise to seasonal demand spikes leading to price rises. The gold monetization scheme never took off as it was in direct conflict with the cultural value of holding physical gold. This scheme required one to bring her or her ancestral gold to a bank, which would melt the jewellery and would issue a paper gold with its melted weight - this scheme was one of those dead on arrivals case!
The Gold Bond scheme
Per this scheme, you can buy gold bond worth 2g to 500g for a period of 8 years, with an option to exit from the 5th year. The bond will receive an interest of 2.75% p.a to be paid semi-annually. Some number crunching is provided below for illustrative purposes to help you understand the product, its returns and taxes better.
Inflation 5% Scenario 1 Scenario 2 Scenario 3
Price Rise 5% p.a Price Rise 15% p.a Price Same/Fall
Investment in 2015 250000 250000 250000
Maturity amt in 2023 369364 764756 250000
Capital Gain 0 422614 0
CG Tax @20.6% 0 87058 0
Interest earned over 8yrs 55000 55000 55000
Net Profit (after Tax) 174364 482698 55000
Net Tax rate 0.00% 11.38% 0.00%
Assuming inflation of 5% over the next 8 years, tax is calculated by applying indexation benefits as per section (48) of the Income Tax Act. Scenario 1 assumes that gold price appreciates by 5% every year (Long term average return from gold) and Scenario 2 assumes a 15% appreciation (similar to 2003-11 era returns). Scenario 3 assumes no change to gold price or even a fall in price. It can be seen that in all the 3 cases, there is Net profit albiet it is relatively lower in (3). And although you pay higher taxes in Scenarios (2), you stand to gain most if this case fructifies.
Who should invest?
Well, the gold bond scheme would certainly outdo any other scheme in its own league - such as gold monetization, gold chit scheme etc. But, this scheme would be most suited for two kinds of investors. Investors with a clear asset allocation for gold, say 5% or 8% of their net-worth, would form the first group. Next, investors who have an impending marriage in the next 8-10 years could choose this scheme as this scheme would not tie them to a jeweler later. Lastly, I would caution investors not to compare the returns from this scheme with returns from FD, Property or Mutual Fund when making investment decisions. This scheme is clearly only for those who have already chosen to invest in gold as an asset class. If you have spare cash, I would recommend allocating only as per your current asset allocation!
The Problem
The fundamental problem being addressed here is in ensuring that the Indians' love for the yellow metal does not damage the broader economy. How so? Indians' insatiable thirst for gold leads to huge imports (842 tons in 2014) every year leading to a spike in India's import bill. Gold forms 12% of our total imports. This causes a huge trade deficit, which in turn causes serious repercussions in the economy such as unstable macro climate, low sovereign rating, higher borrowing rates, currency fluctuations, capital outflow from stocks, bonds, rise in interest rate & inflation and lastly lower employment.
Since 2013, the government has taken a number of measures ranging from curbing of imports by levying extra taxes to imposing import quotas for jewelers and had even attempted to monetize the stock of physical gold in the country through the recent gold monetization scheme. While the two former policies helped to bring down gold imports to a certain extent, it also gave rise to seasonal demand spikes leading to price rises. The gold monetization scheme never took off as it was in direct conflict with the cultural value of holding physical gold. This scheme required one to bring her or her ancestral gold to a bank, which would melt the jewellery and would issue a paper gold with its melted weight - this scheme was one of those dead on arrivals case!
The Gold Bond scheme
Per this scheme, you can buy gold bond worth 2g to 500g for a period of 8 years, with an option to exit from the 5th year. The bond will receive an interest of 2.75% p.a to be paid semi-annually. Some number crunching is provided below for illustrative purposes to help you understand the product, its returns and taxes better.
Inflation 5% Scenario 1 Scenario 2 Scenario 3
Price Rise 5% p.a Price Rise 15% p.a Price Same/Fall
Investment in 2015 250000 250000 250000
Maturity amt in 2023 369364 764756 250000
Capital Gain 0 422614 0
CG Tax @20.6% 0 87058 0
Interest earned over 8yrs 55000 55000 55000
Net Profit (after Tax) 174364 482698 55000
Net Tax rate 0.00% 11.38% 0.00%
Assuming inflation of 5% over the next 8 years, tax is calculated by applying indexation benefits as per section (48) of the Income Tax Act. Scenario 1 assumes that gold price appreciates by 5% every year (Long term average return from gold) and Scenario 2 assumes a 15% appreciation (similar to 2003-11 era returns). Scenario 3 assumes no change to gold price or even a fall in price. It can be seen that in all the 3 cases, there is Net profit albiet it is relatively lower in (3). And although you pay higher taxes in Scenarios (2), you stand to gain most if this case fructifies.
Who should invest?
Well, the gold bond scheme would certainly outdo any other scheme in its own league - such as gold monetization, gold chit scheme etc. But, this scheme would be most suited for two kinds of investors. Investors with a clear asset allocation for gold, say 5% or 8% of their net-worth, would form the first group. Next, investors who have an impending marriage in the next 8-10 years could choose this scheme as this scheme would not tie them to a jeweler later. Lastly, I would caution investors not to compare the returns from this scheme with returns from FD, Property or Mutual Fund when making investment decisions. This scheme is clearly only for those who have already chosen to invest in gold as an asset class. If you have spare cash, I would recommend allocating only as per your current asset allocation!
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