The Centre has released a draft paper on the sovereign gold bond scheme mentioned in the Budget. India imports about 300 tonnes of gold in coin form every year.

As this is assumed to be investment demand, the government wants to replace this by offering gold bonds for investment purposes, with a sovereign guarantee.

These bonds offer a better alternative to coins. You need not worry about safekeeping your gold or incur fund management charges, as you do for gold ETFs.

According to the draft paper, gold bonds will be issued for tenures of five to seven years, in denominations of 2, 5 and 10 gram. The bond will be priced at the prevailing market price for gold.

At the time of maturity again, the bond will be redeemed at gold’s prevailing market price. This instrument will be tradable on commodity exchanges and allowed as collateral for loans. The other advantage here is that the Centre proposes to pay at least 2 per cent interest on these gold bonds (which would be calculated on the weight of gold).

However, both interest and the maturity proceeds may be in rupee terms only. Returns will thus be affected by exchange rates. It is intended to cap the maximum investment in these bonds to 500 gram per person per year. The draft paper has also proposed to tax gains in these bonds similar to physical gold.

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