Daily Current Affairs : 19-December-2024

The Indian government is contemplating the discontinuation of the Sovereign Gold Bond (SGB) Scheme due to its high financing costs. However, the scheme has been popular among investors as a secure, interest-earning alternative to physical gold. In this essay, we will explore the key features, benefits, and risks of the SGB scheme, and discuss why the government is considering discontinuing it.

What is the Sovereign Gold Bond Scheme?

Launched in November 2015, the Sovereign Gold Bond Scheme is a government-backed debt security issued by the Reserve Bank of India (RBI) on behalf of the Government of India. It is designed to provide an alternative to holding physical gold, offering both security and interest to investors. The bonds are denominated in grams of gold, making it an attractive option for those who wish to invest in gold but do not want the risk of theft or purity issues that come with physical gold.

Key Features of the SGB Scheme:

  • Issuer: Reserve Bank of India (RBI)
  • Eligibility: Indian residents, including individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. Minors can invest through guardians.
  • Investment Limits:
    • Minimum: 1 gram of gold
    • Maximum: 4 kg for individuals/HUFs, 20 kg for trusts per fiscal year.
Benefits of the SGB Scheme

The SGB scheme offers several advantages over physical gold investment:

  • Interest: Investors earn a fixed interest of 2.5% per annum, paid every six months.
  • Security: Since these are government-backed bonds, there is no risk of theft or purity concerns.
  • Capital Gains Tax Exemption: Investors are exempt from capital gains tax on redemption of the bonds.
  • Market Value Assurance: The gold price at the time of redemption is guaranteed by the government.
Risks Involved

Despite its benefits, the SGB scheme is not without risks:

  • Price Fluctuations: The returns on the bonds are directly tied to the market price of gold. If the price of gold falls, investors could incur a capital loss.
  • Interest Rates: The fixed interest of 2.5% may not always beat inflation or offer high returns compared to other investment options.
Important Points
  • Launched: The Sovereign Gold Bond (SGB) Scheme was launched in November 2015 by the Government of India.
  • Issuer: The bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India.
  • Alternative to Physical Gold: SGB offers a secure, interest-earning alternative to holding physical gold.
  • Eligibility: Open to Indian residents, including individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
  • Investment Limits:
    • Minimum: 1 gram of gold.
    • Maximum: 4 kg for individuals/HUFs; 20 kg for trusts per fiscal year.
Benefits of SGB:
  • Interest: Offers 2.5% annual interest, paid every six months.
  • Security: No risk of theft or purity concerns associated with physical gold.
  • Tax Benefits: Exemption from capital gains tax on redemption.
  • Gold Price Assurance: The redemption value is based on the market price of gold at the time of maturity.
Risks of SGB:
  • Market Fluctuations: Returns are tied to the market price of gold, so capital loss is possible if gold prices fall.
  • Fixed Interest Rate: The 2.5% annual interest may not always be sufficient compared to other investment options or inflation.
Government’s Concern:
  • The Indian government is considering discontinuing the scheme due to high financing costs involved in managing it.
Why In News

The Indian government is considering discontinuing the Sovereign Gold Bond (SGB) Scheme due to high financing costs, despite its role in offering a secure, interest-earning alternative to physical gold, as the financial burden of managing the scheme outweighs its benefits in the long term.

MCQs about Discontinuation of Sovereign Gold Bond Scheme
  1. Which organization issues the Sovereign Gold Bonds on behalf of the Government of India?
    A. Indian Stock Exchange
    B. Reserve Bank of India (RBI)
    C. Ministry of Finance
    D. Securities and Exchange Board of India (SEBI)
    Correct Answer: B. Reserve Bank of India (RBI)
    Explanation: The Reserve Bank of India (RBI) issues the Sovereign Gold Bonds on behalf of the Government of India, making them a government-backed security.
  2. What is the maximum investment limit for an individual in the SGB Scheme per fiscal year?
    A. 1 kg
    B. 2 kg
    C. 4 kg
    D. 10 kg
    Correct Answer: C. 4 kg
    Explanation: Individuals and Hindu Undivided Families (HUFs) can invest up to 4 kg of gold under the Sovereign Gold Bond Scheme per fiscal year.
  3. Why is the Indian government considering discontinuing the SGB Scheme?
    A. Decreasing gold prices
    B. Low investor interest
    C. High financing costs
    D. Strong competition from other investment schemes
    Correct Answer: C. High financing costs
    Explanation: Despite offering a secure and interest-earning alternative to physical gold, the government is considering discontinuing the Sovereign Gold Bond Scheme due to the high financing costs associated with managing it.

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