Gold Bonds Act: Incentive to Invest in Gold Bonds

Gold bonds are debt instruments and denominated in grams of gold. These bonds act as a substitute for actual gold. In India, the government issues Sovereign Gold Bonds under the SGB scheme.

To mobilise the stagnant gold resources of Indian residents and encourage people to invest in gold bonds, the government enacted the Gold Bonds (Immunities And Exemptions) Act in 1993 (the Gold Bonds Act hereinafter). The Act aims to immunise gold bond subscribers and exempt people investing them from paying taxes.

The Gold Bonds (Immunities and Exemptions) Act of 1993

The Gold Bonds Act was a critical step in the 1990s and has changed the Indian government’s handling of its gold reserves. The Act provided necessary incentives to promote investment in gold bonds.

The Act empowers the central government to draft a scheme for gold bond subscription. The government introduced the scheme through an official gazette. The formulated scheme was subsequently presented to each house of the parliament per the Act’s provisions.

SGB Scheme

The central government launched the SGB Scheme in 2015 as part of the Gold Monetisation Scheme. The Reserve Bank of India with the central government’s input on behalf of the central government issued subscriptions for the scheme in several parts (tranches). The RBI lays down the guidelines and requisites for the SGB scheme.

• Only Indian resident persons (judicial persons also), including representatives of minors, Universities, charities, can buy SGBs.
• SGBs are denominated in grams of gold, with 1 g the basic unit.
• Gold bond is a debt instrument that allows the subscriber (investor) to earn interest. The government pays a total of 2.5% interest on the gold bonds two times a year, every 6 months in cash or e-banking or demand draft. This interest is taxable.
• A limit exists on the subscription of the gold bonds depending on the kinds of subscribers. For instance, an Individual and a Hindu Undivided Family can subscribe to a maximum of 4 kgs.
• The bond has a term of 8 years, and an exit option is available in the fifth, sixth and seventh years on the date of interest payment, respectively. They can also be converted into the Demat form.

Subscribers Immunity

The Gold Bonds Act confers certain rights on the subscribers of gold bonds as a part of granting immunity and exemptions. Despite provisions under the wealth tax act, Income Tax Act, Gift Tax Act, Customs Act, Foreign Contribution (Regulation) Act, and Foreign Exchange Regulation Act:

1. The subscribers are entitled not to disclose information on how they acquired the gold bond or money with which they acquired gold for any purpose.
2. Owning gold bonds cannot be a ground for initiating an investigation or inquiry against a subscriber.
3. Owning a gold bond will not be considered evidence for proceedings under the aforementioned acts. However, any subscriber facing such legal proceedings instituted before the enactment of this legislation does not have immunity under this Act.

The immunity does not extend to the following:

1. Certain offences under Chapter 9 or Chapter 17 of the IPC, the Terrorist and Disruptive Activities (Prevention) Act, 1987, the Narcotic Drugs and Psychotropic Substances Act, 1985, and the Prevention of Corruption Act, 1988.
2. Enforcing civil liability.

Background of the Gold Bonds Act,1993

• India was undergoing a currency crisis in 1991 due to high expenditure and less borrowing, which did not last for longer periods. Despite many suggestions to boost foreign exchange reserves, the Indian government did not act upon it until it had to sell 20 tonnes and 47 tonnes of gold to the Union Bank of Switzerland and Bank of England with repurchase options to acquire 200 million USD and 405 million USD, respectively. Following this, the RBI reconsidered its gold assets and started to value them at market rates.
• After the liberalisation, privatisation, and globalisation reforms in 1991, the RBI and central government decided to increase the gold reserves in the country. They introduced the GBS under the Gold Bonds (Immunities and Exemptions) Ordinance of 1993. The scheme became operational on 15th March 1993 and closed on 14th June 1993. Under this scheme, a subscriber invested at least 500 g of gold.
• The term of the scheme was 5 years, and the subscribers were paid a total interest of Rs. 40 for 1 g of gold. After 5 years, the subscribers received their gold back. The Gold Bonds (Immunities and Exemptions) Act of 1993 repealed the GBS of 1993.
• The government mobilised over 41 tonnes of gold because of the Gold Bonds (Immunities and Exemptions) Act of 1993, which granted immunity to subscribers, encouraging residents to invest in gold bonds. By 1994, the RBI held 400 tonnes of gold as a result of the mobilisation. Income was generated by increasing gold reserves.

Summary of the Act

• The Gold Bonds Act is concise and lays down its objectives as follows:
  1. To promote investing in gold bonds instead of physical gold and create mobilisation in the gold resources of Indian residents.
  2. To confer certain rights and direct tax exemption on gold bond subscribers to encourage investment in gold bonds.
• The Act defines relevant terms under Section 2 including subscriber, gold bond, and other terms per the Income Tax Act 1961. The act deals with formulating a GBS and grants certain aforementioned immunities to the subscribers.
• The Act specifically lays down that the provisions of the Income Tax Act of 1961 do not extend to the amount earned as interest on gold bonds or long-term capital gains.
• Additionally, if the subscriber gifts gold bonds to their relatives (children, spouse, or parent only), then the Gift Tax Act of 1958 is not applicable.

Tax Exemption on Gold Bonds

Interest earned on SGBs is taxable, but no provision enforces Tax Deducted at Source.

Gold bond tax exemption is available when redeemed at the end of their term (8 years). Capital gains earned by the end of the term are wholly exempted from tax. The government provides this tax benefit to encourage Indian residents to buy gold bonds as a replacement for physical gold. Thus, if the subscriber surrenders the bonds to the RBI, they are exempted from paying tax on capital gains.

STCG and LTCG

• Tax exemption is not available if the subscriber chooses an early exit option by redeeming them before the term (8 years) by selling them in the secondary market.
• If the subscriber sells within 3 years of subscription and makes a profit, then it qualifies as short-term capital gain (STCG), and is liable to be taxed. This amount, combined with the subscriber’s annual income, becomes taxable under the appropriate tax slab.
• For instance, if the annual income of a subscriber falls under the 15% slab, the subscriber must pay 15% of the profit as STGC.
• In case the subscriber makes a profit by selling the units after 3 years, then the profit is taxed as long-term capital gain, and if the subscriber claims indexation, 20% of the profit is taxed and if it is not claimed, 10% of the profit is taxed as LTCG.

Holding gold bonds until their maturity enables the subscribers to avail complete tax exemption while redeeming gold bonds after 3 years of holding will ensure lowered taxable income upon claiming indexation. Thus, tax benefits only apply when the gold bonds are held until maturity or redeemed after 3 years.

Conclusion

Many Indian residents consider gold to be an excellent investment option. However, the Gold Bonds Act provides a necessary incentive to encourage Indian residents to invest in gold bonds, but it does not address the crux of the problem.

The crux here is the lack of knowledge among many Indians on making investments. Most people are yet to learn how gold bonds operate and the benefits of investing in SGB. Therefore, the government should make provisions to create awareness of gold bonds because coupled with the incentives under the Gold Bonds Act, this scheme will increase the number of subscribers of gold bonds, leading to the growth of the country’s gold reserves and achieving the objectives of the Act.