The first tranche of sovereign gold bond issue of FY21 opened for subscription on Monday and was priced at ₹4,639 per unit. The previous issues are trading at a discount to the current issue as well as to the price of physical gold.
The current issue price of gold bond is calculated based on the average price of the last three business days of the week preceding the issue week. Also, there is a discount of ₹50 per unit for those buying online.
Every issue of gold bonds has to be listed on exchange within fortnight of the issuance on a date as notified by the Reserve Bank of India.
There are 37 previous issues of gold bonds which are trading on the exchange. As per the trading price of these bonds on 21 April on National Stock Exchange (NSE), all of these are at a discount to the current issue price and to physical gold. The discount is in the range of 1% to 6% depending on the maturity period of the bond.
This basically means that you can buy earlier issues of gold bonds at a price lower than the current price of physical gold or the current issue of gold bonds, from the exchange. However, if you are planning to buy these bonds from the secondary market, you need to understand why these bonds trade at a price lower than the current market price of gold.
The difference between the trading price of gold bond and the price of physical gold is the cost of providing liquidity to the seller which the seller of the bonds has to pay to offload his or her bond holdings.
The buyer of gold bonds on exchange knows that if someone is coming to an exchange to sell his gold bond holdings, he or she must be in need of money and therefore, won’t mind selling them on a discount to the market price.
Therefore, the buyer benefits by getting gold bonds at a lower rate than the market price of gold and the seller gets liquidity. The nearer the bond to its maturity lower will be the discount and vice versa. Gold bonds have a maturity of eight years with an option to exit after 5 years.
If you plan to buy these bonds from the secondary market, you should go for it only if you hold them till maturity as its liquidity is not very high.
On the other hand, if you want to sell them on the exchange, you may have to settle for a price lower than the prevailing market price of gold at that time.
Also, holding gold bonds till maturity is tax efficient as there is no capital gains tax in case you redeem them on maturity.
The investor earns additional 2.5% p.a interest apart from the capital variation (appreciation/ depreciation). This interest is taxable as per your income slabs. There is no TDS on the interest payout but you need to show it while filing your IT returns and pay Advance Tax accordingly as applicable.
Source: Livemint