Capital Gains Bonds

What is Capital Gains Bonds? | 54EC Bonds | 1 Best Guaranteed Regular yearly income

by with No Comment Bonds

Table of Contents

Blog Introduction

Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on Capital Gains Bonds.

Generally when we want to invest money on any investment scheme , we always asks our friends and relatives that where we can invest ? and they suggests the investment schemes which they like most. Then we invest as per their suggestions, that is good as we consider them as our well wisher , But here I want to mention one thing, if we know end to end information of each investment schemes at least it will help us to understand if that investment scheme is good for us or not.

Hence it is better to have a complete idea about each investment scheme where we invest. Therefor this blog will help you to know end to end information of many Indian investment schemes available right Infront of you.

In this blog post I will be explaining my analysis on Capital Gains Bonds. This will be a complete guide on Capital Gains Bonds. Please read till end of the blog post to know the complete information about this Capital Gains Bonds. Lets get started.

What is Capital Gains Bonds?

Capital Gains Bonds is also known as 54EC Bonds. 54EC Bonds is NOT a name of a bond. It is the name of a category. There are a few bonds that provide long term capital gains tax exemption under Section 54EC of the Income Tax Act. Hence, they got the name “54EC Bonds”.

If you get long term capital gain (LTCG) by selling your real estate property (land or building or both), then you have to pay long term capital gains tax. There are a few methods in which you can avoid paying long term capital gains tax.

One of the methods is to invest the long term capital gain amount in 54EC bonds.

  • 54EC bonds is specifically for those who wants to avoid long term capital gains tax from the sale of a real estate property (land or building or both). Both residential and commercial properties will be considered.
  • Long term capital gains from other capital assets such as Shares, Mutual Funds, Gold or Bonds will NOT be allowed to invest in 54EC bonds.
  • Short term capital gains from any of the capital assets will NOT be allowed to invest in 54EC bonds.
  • You should invest in 54EC bonds within 6 months from the date of sale of the real estate property to get long term capital gains tax exemption under Section 54EC of the Income Tax Act.

History Of Capital Gains Bonds or 54EC Bonds

Section 54EC of the Income Tax Act was introduced back in 01-Apr-2001. Earlier, the long term capital gain from any capital asset was allowed to invest in 54EC bonds to get exemption. But, from 01-Apr-2018 onwards, only the long term capital gain from the real estate property (land or building or both) was allowed to get exemption.

How Does 54EC or Capital Gains Bonds Work?

  • Deposit the long term capital gain amount from the sale of a real estate property and purchase the bond. A maximum of Rs. 50 lakhs will be allowed to invest.
  • You’ll receive the interest amount every year for the period of 5 years.
  • At the end of 5 years, you’ll get your deposit amount back.

Features

  • Backed by the Government of India.
  • Safest way to avoid long term capital gains tax from a sale of a real estate property.
  • Guaranteed returns
  • Regular yearly income.
  • People of all the age groups can invest (including NRIs)
  • Nomination facility

Income Tax Benefits of Capital Gains Bonds or 54EC Bonds

  • The lump sum deposit amount (long term capital gain from a sale of real estate) won’t get any tax deduction benefit under Section 80C of the Income Tax Act.
  • The interest amount that you receive every year is taxable. During tax returns, you need to declare the interest income under “Income from Other Sources” and pay the income tax as per your income tax slab.
  • TDS (Tax Deducted at Source) is NOT applicable in this bond.
  • Capital Gains Tax (CGT) is not applicable for this bond as you can’t sell it on the Secondary market (Share market).

Who Can Purchase This Capital Gains Bonds?

  • 54EC bond is NOT for everyone.
  • This bond is specifically for those who wants to avoid long term capital gains tax from a sale of a real estate property (land or building or both).
  • People of all the age groups can purchase this bond to get long term capital gains tax exemption.

Where Can You Purchase The Capital Gains Bonds?

This bond is provided by the following companies. These companies are backed by the Government of India.

  • National Highways Authority of India (NHAI).
  • Rural Electrification Corporation (REC).
  • Power Finance Corporation (PFC).
  • Indian Railway Finance Corporation (IRFC).

These companies are selling the bonds through some of the Banks. You can submit an application in one of the following Banks to purchase this bond.

The bond provider and the corresponding Banks are given below.

National Highways Authority of India (NHAI):

  • Union Bank of India.
  • HDFC Bank.
  • Axis Bank
  • Canara Bank.
  • ICICI Bank.
  • IDBI Bank.

Rural Electrification Corporation (REC):

  • Union Bank of India
  • HDFC Bank
  • Axis Bank
  • Canara Bank
  • ICICI Bank
  • IDBI Bank
  • IndusInd Bank

Power Finance Corporation (PFC):

  • HDFC Bank
  • Canara Bank
  • ICICI Bank
  • IndusInd Bank
  • Yes Bank
  • Kotak Mahindra Bank

Indian Railway Finance Corporation (IRFC):

  • HDFC Bank
  • Axis Bank
  • Canara Bank
  • ICICI Bank
  • IDBI Bank
  • State Bank of India (SBI)

How Do You Purchase The Capital Gains Bonds?

You can purchase the bond using

  • Cheque
  • Demand Deaft (DD)
  • Online

You can hold this bond in either physical format or demat format.

Deposit Limits of Capital Gains Bonds

  • The minimum and maximum deposit limits per financial year are given below.
  • The minimum deposit amount is Rs. 20,000 for REC, PFC and IRFC. But, for NHAI, the minimum deposit amount is Rs. 10,000.
  • The maximum deposit amount is Rs. 50 Lakhs.
  • The deposit amount should be in multiples of Rs. 10,000.

There is one condition about the maximum deposit amount. The long term capital gain amount from a sale of a property in a financial year should not be split across two financial years.

Example:

Let us assume you sold your property in the month of December and got a capital gain amount of Rs. 1 crore. You have 6 months time to invest this amount in 54EC bonds. In this scenario, you should not split Rs. 1 crore across two financial years. You can’t invest Rs. 50 lakhs in March (current FY) and then you can’t invest the remaining Rs. 50 lakhs in April (next FY).

So, the maximum amount you can invest is Rs. 50 lakhs only. For the remaining amount, you need to look for other methods.

Maturity Period of Capital Gains Bonds

  • The maturity period of this bond is 5 years.
  • At the end of 5 years, you’ll get your entire deposit amount back.

Note : Earlier, the maturity period was 3 years only. But, from 01-Apr-2018 onwards, the maturity period was increased to 5 years.

Interest Rate (%) of Capital Gains Bonds

The current annual interest rate is 5.00%.

The interest amount will be paid to you every year from the date of purchase. But, the interest payment date varies from one company to another. The below table provides the interest payment date of the bond provider companies.

Bond ProviderInterest Payment Date
National Highways Authority of India (NHAI)1st April of every year. Final interest at the time of maturity
Rural Electrification Corporation (REC)30th June of every year. Final interest at the time of maturity
Power Finance Corporation (PFC)31st July of every year. Final interest at the time of maturity
Indian Railway Finance Corporation (IRFC)15th October of every year. Final interest at the time of maturity
Interest Rate (%)

The interest rate (on the day of purchase) will remain the same throughout the tenure. It will not change even if there are changes to the interest rate thereafter.

There is no cumulative (compounding) option available in this bond. It means that the interest amount will not compound in this scheme. Only the interest payout option is available. So, you have to receive the interest amount every year.

Earlier, the interest rate was 5.75% for this bond. But, it was reduced to 5% from 01-Aug-2020 onwards.

Compounding Frequency of Capital Gains Bonds

Compound interest is not applicable in this scheme as there is no cumulative option available in this bond. Only simple interest calculation is followed in this scheme.

Interest Credit Method of Capital Gains Bonds

The yearly interest amount from the bond will be paid directly to your Savings Bank (SB) account that you provided at the time of bond purchase.

Pre-Mature Closure

Pre-mature closure option is not available in this bond as you can’t sell this bond on the secondary market. Also, you can’t transfer this bond to another person.

In case of Death During The Term?

In case of death during the tenure of the bond, then the bond will be transferred to your nominees or legal heirs. The nominee should hold the bond till the maturity date.

Bond Transfer & Tradability

This bond can’t be transferred to another person. Also, this bond is not tradable on the secondary market (Share Market). It means that you can’t sell these bonds in the secondary market.

Returns Projection Table

Lump Sum Deposit AmountAnnual Interest Rate %Terms in yearsYearly Interest Pay-outTotal Interest ReceivedTotal Benefit
1,00,0005%5 Years500025,0001,25,000
5,00,0005%5 Years25,0001,25,0006,25,000
7,50,0005%5 Years37,5001,87,5009,37,500
10,00,0005%5 Years50,0002,50,00012,50,000
15,00,0005%5 Years75,0003,75,00018,75,000
20,00,0005%5 Years1,00,0005,00,00025,00,000
25,00,0005%5 Years1,25,0006,25,00031,25,000
30,00,0005%5 Years1,50,0007,50,00037,50,000
35,00,0005%5 Years1,75,0008,75,00043,75,000
40,00,0005%5 Years2,00,00010,00,00050,00,000
50,00,0005%5 Years2,50,00012,50,00062,50,000
Returns Projection Table

FAQ About Capital Gains Bonds

I am a NRI can I Invest in Capital Gains Bonds

NRI (Non Resident Indians) are eligible to purchase this bond. If an NRI wants to avoid long term capital gains tax from a sale of a real estate property, then he can invest in this bond.

Is there any loan facility available Capital Gains Bonds?

There is no loan facility available in this bond. Also, you can’t use this bond as a collateral security to get loans from the Banks, Financial Institutions or Non-Banking Financial Companies (NBFC).

How to Nominate family members in Capital Gains Bonds?

Nomination facility is available in this bond. You can nominate one or more people as your nominees. Also, you can change nominations at any time during the tenure of the bond.

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Floating Rate Savings Bonds

What Is Floating Rate Savings Bonds | FRSB | Guaranteed and regular interest amount every 6 months

by with No Comment Bonds

Table of Contents

Blog Introduction

Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on Floating Rate Savings Bonds.

Generally when we want to invest money on any investment scheme , we always asks our friends and relatives that where we can invest ? and they suggests the investment schemes which they like most. Then we invest as per their suggestions, that is good as we consider them as our well wisher , But here I want to mention one thing, if we know end to end information of each investment schemes at least it will help us to understand if that investment scheme is good for us or not.

Hence it is better to have a complete idea about each investment scheme where we invest. Therefor this blog will help you to know end to end information of many Indian investment schemes available right Infront of you.

In this blog post I will be explaining my analysis on Floating Rate Savings Bonds. This will be a complete guide on Floating Rate Savings Bonds. Please read till end of the blog post to know the complete information about this Floating Rate Savings Bonds. Lets get started.

What is Floating Rate Savings Bonds?

The Floating Rate Savings Bonds is a type of Bond in which the interest rate (coupon rate) will be revised by the Government every 6 months. So, the interest (coupon) amount you receive will also change every 6 months. Because of this reason, this bond got the name “Floating Rate”. This floating interest rate (coupon rate) is applicable for both old and new investors.

There is no cumulative (compounding) option in this bond. It means that the interest will not compound in this scheme. Only the interest payout option is available. So, you have to receive the interest every 6 months.

History Of Floating Rate Savings Bonds

Floating Rate Savings Bonds, 2020 was launched by the Government of India and it has been effective since 01-July-2020. Earlier, there was a bond called “RBI 7.75% Savings Bonds”. The Government has stopped issuing this bond on 28-May-2020. Instead, it came up with a new bond called Floating Rate Savings Bonds.

How Does FRSB Work?

  • Deposit a lump sum amount and purchase the bond.
  • You’ll receive the interest (coupon) amount every 6 months for the period of 7 years as per the floating interest rate (%) applicable from time to time.
  • At the end of 7 years, you’ll get your deposit amount back.

Features of Floating Rate Savings Bonds

  • Backed by the Government of India.
  • Safe investment option.
  • Guaranteed returns (but returns may vary due to floating interest rate).
  • Regular half-yearly income.
  • No maximum limit on the deposit amount.
  • People of all the age groups can invest.
  • Nomination facility.

Income Tax Benefits

  • No income tax benefits.
  • No tax deduction benefits for the deposit amount under Section 80C of Income Tax Act.
  • TDS (Tax Deducted at Source) is applicable. TDS will be deducted if the interest (coupon) earned from the Bond is more than Rs. 10,000 in a financial year.
  • If you want to avoid TDS, then you’ll have to get the Exemption Certificate from the Income Tax department. Note that submitting self-declaration forms such as Form 15G or 15H won’t help to avoid TDS.
  • The interest (coupon) amount received is taxable. During tax returns, you need to declare the interest income under “Income from Other Sources” and pay the income tax as per your income tax slab.
  • Capital Gains Tax (CGT) is not applicable for this bond as you can’t sell them on the Secondary market (Share market).

Who Can Purchase This Bond?

FRSB can be purchased by

  • Resident Indians
  • Hindu Undivided Family (HUF)

A resident Indian can purchase this bond

  • individually
  • jointly with others
  • on behalf of a minor of whom he is the legal guardian

Where Can You Purchase The Bond?

You can purchase the bond from the following Banks.

  1. State Bank of India.
  2. Bank of Baroda (including Vijaya Bank and Dena Bank).
  3. Bank of India.
  4. Bank of Maharashtra.
  5. Canara Bank (including Syndicate Bank).
  6. Central Bank of India.
  7. Indian Bank (including Allahabad Bank).
  8. Indian Overseas Bank.
  9. Punjab National Bank (including Oriental Bank of Commerce and United Bank of India).
  10. Punjab & Sind Bank
  11. Union Bank of India (including Andhra Bank and Corporation Bank).
  12. UCO Bank.
  13. HDFC Bank.
  14. ICICI Bank.
  15. IDBI Bank.
  16. Axis Bank.

How Do You Purchase The Bond?

You can purchase the bond using

  • Cash (upto Rs. 20,000 only).
  • Demand Draft (DD).
  • Cheque
  • Online

When you purchase, the bond will be issued only in Demat form and it’ll be held in an account called Bond Ledger Account (BLA). For the proof of purchase, a “Certificate of Holding” will be given to the investor.

Deposit Limits in Floating Rate Savings Bonds

  • The minimum deposit amount is Rs. 1,000.
  • There is no limit on the maximum deposit amount. You can deposit as much as you can.
  • The deposit amount should be in multiples of Rs. 1,000.

Floating Rate Savings Bonds Maturity Period

The maturity period of this bond is 7 years. At the end of 7 years, the entire deposit amount will be given back to you.

Interest Rate (Coupon Rate) %

  • The current annual interest rate (coupon rate) is 7.15% and it is for the 6 months period from 01-Jan-2022 to 30-Jun-2022.
  • The interest rate of this bond will be revised every 6 months and it’ll happen on 1st January and 1st July of every year.
  • So, the interest (coupon) amount for the 6 months period will be paid on 1st January and 1st July of every year. It means that irrespective of your start date of the bond, you’ll receive the interest only on 1st January and 1st July of every year.
  • This floating interest rate (coupon rate) is applicable for both old and new investors. It means that the interest rate is not fixed for anyone. Every investor should go through the interest rate change cycles.
  • There is no cumulative (compounding) option available in this bond. It means that the interest amount will not compound in this scheme. Only the interest payout option is available. So, you have to receive the interest every 6 months.
  • The revision of the interest rate will be 0.35% more than the interest rate of National Savings Certificate (NSC) scheme.

Interest Credit Method

The half-yearly interest (coupon) amount from the bond will be paid directly to your Savings Bank (SB) account.

Pre-Mature Closure

Pre-mature closure is allowed only for those whose age is 60 years and above subject to the completion of the minimum lock-in period. The minimum lock-in period varies for each age group as mentioned in the below table.

Age GroupMinimum Lock-in Period
60 to 70 years6 years from the date of issue
70 to 80 years5 years from the date of issue
80 years and above4 years from the date of issue
Pre-Mature Closure

In case of joint account holders of the bond, any one person needs to fulfil the above conditions. After fulfilling the above conditions, the eligible investor can surrender the bond at any time. But, the Government will process the request and pay you the interest (coupon) amount only on the interest payment dates. That is, 1st January and 1st July of every year.

For example, after fulfilling the above conditions, if you surrender the bond in the month of February, you still need to wait till 1st July to receive the final interest (coupon) amount. There will be a penalty for pre-mature closure even after fulfilling the above conditions. The penalty amount is 50% of the last interest (coupon) amount.

In case of Death During The Term?

In case of death during the tenure of the bond, the bond will be transferred to your nominees or legal heirs. The nominee should hold the bond till the early redemption period or till maturity.

Bond Transfer & Tradability

These bonds can’t be transferred to another person. Also, these bonds are not tradable in the secondary market (Share Market). It means that you can’t buy or sell these bonds in the secondary market.

FAQ About Floating Rate Savings Bonds

I am a NRI can I Invest in Floating Rate Savings Bonds?

NRI (Non Resident Indians) are not eligible to purchase this bond. But, if a resident becomes NRI during the tenure of the Bond, then he can continue to hold the bond until maturity.

Is the any Loan facility available in Floating Rate Savings Bonds?

There is no loan facility available in this bond. Also, you can’t use this bond as a collateral security to get loans from the Banks, Financial Institutions or Non-Banking Financial Companies (NBFC).

Is There any Nomination facility available in Floating Rate Savings Bonds?

Nomination facility is available in this bond. You can nominate one or more people as your nominees. Also, you can change nominations at any time during the tenure of the bond.

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Sovereign Gold Bond

What is Sovereign Gold Bond Scheme ? | SGB | Guaranteed and regular interest amount every 6 months

by with No Comment Bonds

Table of Contents

Blog Introduction

Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on Sovereign Gold Bond Scheme.

Generally when we want to invest money on any investment scheme , we always asks our friends and relatives that where we can invest ? and they suggests the investment schemes which they like most. Then we invest as per their suggestions, that is good as we consider them as our well wisher , But here I want to mention one thing, if we know end to end information of each investment schemes at least it will help us to understand if that investment scheme is good for us or not.

Hence it is better to have a complete idea about each investment scheme where we invest. Therefor this blog will help you to know end to end information of many Indian investment schemes available right Infront of you.

In this blog post I will be explaining my analysis on Sovereign Gold Bond Scheme. This will be a complete guide on Sovereign Gold Bond Scheme. Please read till end of the blog post to know the complete information about this Sovereign Gold Bond Scheme. Lets get started.

What Is Sovereign Gold Bond Scheme?

Sovereign Gold Bond Scheme is a safest way to buy gold in digital (electronic) form as it is issued by the Government of India. It provides a guaranteed return of 2.5% interest per annum (payable every 6 months) and possible asset appreciation opportunity if the value of the gold increases over time. Since the gold is in digital (electronic) form, you need not worry about it’s safety and the cost of storing it.

History Of Sovereign Gold Bond Scheme

Sovereign Gold Bond Scheme was launched by the Government of India back in November 2015. Since then, the Government has been releasing the gold bond every financial year in tranches (parts). This bond is not available all the time. It is available only during the specific period (subscription window). But, you can purchase it on the Share market at any time.

How Does Sovereign Gold Bond Scheme Work?

Deposit a lump sum amount and purchase the gold bond. On the day of purchase, based on the current market price of the gold, the number of grams of gold will be allocated to you in digital form.

You’ll receive the interest amount every 6 months for the period of 8 years. The interest amount will be calculated based on 2.5% annual interest rate on the initial lump sum deposit amount.

At the end of 8 years, you’ll get the maturity amount. The maturity amount will be calculated based on the market price of the gold at the end of the 8th year. So, you’ll get the market price for the number of grams of gold allocated to you initially

If the gold price increases over time, then you’ll have profit. If the gold price goes down, then you’ll incur loss.

Features of Sovereign Gold Bond Scheme

  • Backed by the Government of India.
  • Safest way to purchase the gold in digital form.
  • Guaranteed and regular interest amount every 6 months.
  • Possible asset appreciation opportunity (if gold price increases over time).
  • You’ll get a discount of Rs. 50 per gram of gold if you apply online.
  • No capital gains tax if you hold the bond till maturity date.
  • You can redeem the bond after 5 years without paying any capital gains tax.
  • Bond can be used as collateral for loans.
  • Bond transfer option.
  • Bond is tradable on the Share Market within 14 days from the issue date.
  • Nomination facility.

Income Tax Benefits of Sovereign Gold Bond

The income tax benefits will be the same on both old tax system and the new tax system. There is no tax deduction benefits for the lump sum deposit amount under Section 80C of the Income Tax Act. The interest amount received every 6 months will be taxable. During tax returns, you need to declare the interest amount under “Income from Other Sources” and pay the income tax as per your income tax slab.

TDS (Tax Deducted at Source) is NOT applicable in this scheme. If you hold the bond till the maturity date, then the entire maturity amount will be yours. You need NOT pay any capital gains tax. If you redeem the bond after 5 years (that is, 6th, 7th and 8th year), then you need NOT pay any capital gains tax. You can use the entire amount from the redeem.

If you sell the bond before 5 years, then you’ll need to pay capital gains tax. The capital gains tax amount will be based on the following.

  • If you sell the bond before 3 years, then it’ll be considered as Short Term Capital Gain (STCG). In this case, the gain amount will be added to your income and you need to pay tax as per your income tax slabs
  • If you sell the bond after 3 years, then it’ll be considered as Long Term Capital Gain (LTCG). In this case, the capital gains tax amount will be 20% with indexation

Subscription Calendar

This bond is not available all the time. It is available only during the specific period (subscription window). But, you can purchase the previous series on the Share market at any time. The subscription calendar for the financial year 2022-23 is given below. This calendar will be updated as and when the Government announces new series of subscription.

SeriesSubscription DateIssue Date
Series 1June 20 – June 24, 202228-Jun-2022
Series 2August 22 – August 26, 202230-Aug-2022
Subscription Calendar

Who Can Purchase This Sovereign Gold Bond?

Sovereign Gold Bonds can be purchased by

  • Resident Indians
  • Hindu Undivided Family (HUF)
  • Trusts
  • Universities
  • Charitable Institutions

A resident Indian can purchase this bond

  • individually
  • jointly with others
  • on behalf of a minor of whom he is the legal guardian

Where Can You Purchase The Sovereign Gold Bond?

During the subscription period, you can purchase the bond from the following places.

  • Banks
  • Post Office
  • SHCIL (Stock Holding Corporation of India Limited)
  • Recognised Stock Exchanges (NSE and BSE)

If you want to purchase the bond outside of the subscription period, you can purchase it on the Share market.

How Do You Purchase The Sovereign Gold Bond?

You can purchase the bond using.

  • Cash (up to Rs. 20,000 only).
  • Demand draft (DD).
  • Cheque
  • Online

If you apply online, then you’ll get a discount of Rs. 50 per gram of gold. The gold bonds will be issued as Government of India Stocks. The investors will be given a Holding Certificate for the same. The Bonds are eligible for conversion into Demat form.

Deposit Limits of Sovereign Gold Bond

The minimum and maximum deposit limits per financial year are given below.

  • You need to purchase a minimum of 1 gram of gold.
  • You can purchase a maximum of 4 kg of gold.
  • The purchase should be in multiples of 1 gram of gold.

The maximum limit includes both the purchases from various tranches and the purchases from the Share Market.

In joint accounts, the maximum limit of 4 kg is applicable to the first applicant only. The maximum purchase limit for Hindu Undivided Family (HUF) is 4 kg of gold. The maximum purchase limit for Trusts and similar entities is 20 kg of gold.

Sovereign Gold Bond Scheme Maturity Period & Amount

The maturity period of this bond is 8 years. At the end of 8 years, you’ll receive the maturity amount. The maturity amount is based on the market price of the gold at the end of 8th year. If the gold price increases over time, then you’ll have profit. If the gold price goes down, then you’ll incur loss. RBI will inform you (the investor) one month in advance about the date of maturity of the bond.

Example: Let us assume you purchased 1 gram of gold for Rs. 5,000. At the end of 8 years, if 1 gram of gold is Rs. 10,000, then you’ll receive Rs. 10,000. This is a profit of Rs. 5,000. On the other hand, at the end of 8 years, if 1 gram of gold is Rs. 4,000, then you’ll receive Rs. 4,000 only. This is a loss of Rs. 1,000.

Interest Credit Method in Sovereign Gold Bond Scheme

The half-yearly interest amount from the bond will be paid directly to your Savings Bank (SB) account that you provided at the time of bond purchase.

Pre-Mature Closure of Sovereign Gold Bond Scheme

Pre-mature closure option is available in this bond. You have 2 options for pre-mature closure. They are

  • Close after 5 years : Even though the maturity period is 8 years, the minimum lock-in period is 5 years only. After 5 years, you can redeem the bond with the Reserve Bank of India and get the amount as per the ongoing market price of the gold. You need not pay any capital gains tax. The entire amount is yours. But, you can redeem only on the interest payment dates.
  • Close before 5 years : If you want to close before 5 years, then you can sell the bond in the Share Market. You can trade and sell the bond within 14 days from the issue date as notified by RBI. Depending upon when you sell, you need to pay either Short Term Capital Gains Tax (STCG) or Long Term Capital Gains Tax (LTCG). Please check Income Tax Benefits section for tax related details.

In case of Death During The Term?

Unfortunately, if you die during the tenure of the bond, the bond will be transferred to your nominees or legal heirs. The nominee should hold the bond till the early redemption period or till maturity. Also, the interest amount and the maturity amount are not repatriable.

Bond Transfer & Tradability

The gold bond can be transferred from one person to the another person. Also, the gold bond is tradable in the Share market within 14 days of the issue on a date as notified by RBI.

Loan Facility in Sovereign Gold Bond Scheme

The gold bond can be used as a collateral security to get loan from the Banks and Financial Institutions.

Nomination

Nomination facility is available in gold bonds. You can nominate one or more people as your nominees. Also, you can change nomination at any time during the tenure of the bond.

I am a NRI Can I invest in Sovereign Gold Bond Scheme

NRI (Non Resident Indians) are not eligible to purchase this bond. But, if a resident becomes NRI during the tenure of the Bond, then he can continue to hold the bond until maturity.

what is the Interest Rate (%) in Sovereign Gold Bond Scheme

The current annual interest rate is 2.5%. The interest amount is paid every 6 months from the date of purchase. The interest amount is calculated based on the initial deposit amount. Not based on the ongoing market price of the gold. The interest rate (on the day of purchase) will remain the same throughout the tenure. It will not change even if there are changes to the interest rate thereafter.

Is there any Compounding Frequency available in Sovereign Gold Bond Scheme

Compound interest is not applicable in this bond. Only simple interest calculation is followed in this scheme.

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Bonds

What is Bonds? | 1 best investment Idea

by with No Comment Bonds

Table of Contents

Blogs Introduction

Hello Friends, Welcome to my Blog Investinfy.com the best financial blogs where you will be able to read about the end to end information on many investment schemes and financial topics. In this Blog post we will be focusing on Bonds.

Generally when we want to invest money on any investment scheme , we always asks our friends and relatives that where we can invest ? and they suggests the investment schemes which they like most. Then we invest as per their suggestions, that is good as we consider them as our well wisher , But here I want to mention one thing, if we know end to end information of each investment schemes at least it will help us to understand if that investment scheme is good for us or not.

Hence it is better to have a complete idea about each investment scheme where we invest. Therefor this blog will help you to know end to end information of many Indian investment schemes available right Infront of you.

In this blog post I will be explaining my analysis on Bonds. This will be a complete guide on Bonds. Please read till end of the blog post to know the complete information about this Bonds. Lets get started.

What Is Bonds?

A Bond is an investment instrument. Generally, a bond is a fixed income instrument in which you (the investor) will get a fixed amount of interest (coupon). Bonds work like a loan. Generally, loan means you will borrow money from a Bank. You have to pay back the loan amount along with the interest in the form of EMIs (monthly instalments) to the Bank within the loan term.

But, in Bonds, the loan system is a bit opposite where in you (investor) are giving money to the Bond issuer. So, the Bond issuer will be responsible for paying you back the amount along with the interest within the bond term.

Generally, Bonds are issued by the Government and other Organisations to raise funds for a development project.

For example, Government of India can issue a bond to raise funds for building a national highway, dam or any other infrastructure project for the development of the country.

How Does The Bonds Work?

  • Deposit a lump sum amount and purchase a bond.
  • The bond issuer will pay you the interest (coupon) amount at regular intervals (every 6 months or every year) during the term of the bond.
  • At the end of the term, you’ll get your deposit amount back.

Bonds Features

  • Bonds come under the debt investment category.
  • Quite a few bonds are backed by the Government of India and hence they are safe investment.
  • Generally, bonds are low risk category of investment.
  • You’ll get fixed amount of interest (coupon) at regular intervals (every 6 months or every year).
  • Few bonds provide income tax benefits.
  • If you want to discontinue the bond, then you can try to sell it on the Secondary market (Share Market).
  • 54EC Bonds (Capital Gain Bonds) will help you to save Long Term Capital Gains Tax (CGT) from a sale of a real estate property.
  • Nomination facility is available on all the bonds.

Income Tax Benefits

The income tax benefits will vary from one bond to another. Before investing, you need to check the following things to get a better understanding of tax benefits.

Deposit Amount: You need to check if the deposit amount will get tax deduction benefits under Section 80C of the Income Tax Act. In general, for most of the bonds, there is no deduction benefits under Section 80C.

Interest (Coupon) Amount: You need to check if the interest (coupon) amount paid by the Bond Issuer is taxable or not. In general, for most of the bonds, the interest payout amount is taxable. But, in “Tax Free Bonds”, there is no tax for the interest amount.

TDS (Tax Deducted at Source): You need to check if TDS is deducted by the Bond Issuer while paying the interest amount.

Maturity Amount: You need to check if the maturity amount paid to you at the end of the term is taxable or not. In general, for most of the bonds, the maturity amount is tax free as the bond issuer will pay you back your deposit amount.

Capital Gains Tax (CGT): If you try to sell the bond before the early redemption period (lock-in period) or maturity period, then you need to pay the capital gains tax. If you sell the bond before 1 year from the date of purchase, then you need to pay short term capital gains tax (STCG). If you sell the bond after 1 year from the date of purchase, then you need to pay long term capital gains tax (LTCG).

Bond Terminologies

The bond market follows it’s own terminologies. It is important for you to understand these terms before investing.

Face value (or Par value): It is the amount the Bond issuer promises to repay you on the maturity date of the bond. For example, if the face value of the bond is Rs. 1,000, then this is the amount you’ll get on the day of maturity.

Market value: It is the current market price of the bond. This comes into picture when you try to buy or sell a bond on the secondary market (Share Market). Before maturity date, the market value of the bond will be more than or less than the face (par) value of the bond.

Premium & Discount: Premium means an increase in the market value of a bond. Discount means a decrease in the market value of a bond.

Example: Let’s assume the face value of a bond is Rs. 1,000. After some time, if the market value of the bond is Rs. 1,020, then it is a premium of Rs. 20. After some time, if the market value of the bond is Rs. 980, then it is a discount of Rs. 20.

Coupon: Coupon is nothing but the interest amount paid to you by the Bond issuer. The coupon amount will be paid to you regularly (every 6 months or 12 months) from the date of issue till maturity.

Coupon Rate (%): It is the annual interest rate (%) at which the coupon (interest) amount will be paid to you by the Bond issuer. The coupon rate is calculated on the face value of the bond, not on the market value.

Cumulative: Cumulative means compounding. The interest earned in the bond will be compounded and it’ll be paid to you at the time of maturity.

Non-cumulative: Non-cumulative means there is no compounding. The interest earned in the bond will not compound. It’ll be paid to you at regular intervals (every 6 months or 12 months). It is also known as interest payout method.

Maturity: It is the maturity amount and it’ll be paid to you on the day of maturity. In general, for most of the bonds, your deposit amount will be paid back to you on the day of maturity.

Yield (%): The yield is the return (%) that you get from the Bond. The yield will be the same as that of the coupon rate (interest rate) at the face value of the bond. But, when the market value of the bond increases or decreases, then the yield will be different to the coupon rate.

If the Bond price increases, then the yield will be less than the coupon rate. If the Bond price decreases, then the yield will be more than the coupon rate.

Example: Let’s assume the face value of the Bond is Rs. 1,000 and the coupon rate is 5%. So, the coupon (interest) amount you receive from the bond will be Rs. 50. At face value of Rs. 1,000, the yield (%) will be same as that of coupon rate. That is, 5%.

After some time, if the bond price increases to Rs. 1,020, then the yield will be 4.90% (that is, 50 divided by 1020). After some time, if the bond price decreases to Rs. 980, then the yield will be 5.10% (that is, 50 divided by 980).

Yield to Maturity (YTM): The yield to maturity is the total return (%) expected from the bond if you hold it till the maturity date. It is used as a factor to decide whether purchasing the bond is a good investment or not.

Secured & Unsecured: Secured bond is a safe investment as it is secured by the Bond issuer. For example, the Government of India bonds are secured bonds as they are backed by the Government. Secured bond is low risk and safe investment and hence they offer slightly low returns. They are suitable for low risk investors.

Unsecured bonds are not secured as they are not backed by the bond issuer. You’ll go with the faith and credit rating of the bond issuer if you want to invest in unsecured bonds. For example, the Corporate Bonds are unsecured bonds. Unsecured bonds offer high returns and hence they are risky investment option. They are suitable for high risk investors only.

Credit Rating: Credit rating of a bond represents the credit quality of the Bond issuer. These ratings are published by the credit rating agencies. These ratings will help the investors to decide whether the Bond issuer has the financial capability to pay the face value and the coupon payments in a timely manner.

Listed & Unlisted: Listed bonds are those that are listed on the Stock Exchanges (Share Market). You can buy and sell these bonds on the Stock Exchange. Unlisted bonds are not listed on the Stock Exchanges and hence you can’t buy or sell them on the Exchange.

Zero Coupon: Zero coupon bonds means there will be no coupon (interest) payout during the term of the bond. Generally these bonds are sold at a discounted rate as compared to the face value of the bond.

Example: The face value of the bond is Rs. 1,000. Zero coupon bonds may be sold at say Rs. 800. At the end of the Bond term, you’ll get Rs. 1,000. It is like you’ll invest Rs. 800 and you’ll get Rs. 1,000 on the day of maturity. You won’t get any coupon (interest) during the bond term.

Taxable & Tax Free: Taxable means the coupon (interest) amount from the Bond is taxable. You need to declare the coupon amount under “Income from Other Sources” and you need to pay income tax as per your tax slabs. Tax Free means that the coupon (interest) amount is tax free. You need not pay any income tax on the coupon amount. The entire coupon amount is yours.

Callable (or Redeemable): Callable means that the bond can be called back by the Bond issuer before the maturity date. This generally happens when the interest rate decreases in the market. The bond issuer can call back the bond and then re-issue another bond at a lesser interest rate. Callable bonds work in favour of the bond issuer, not in favour of the investor.

Puttable: Puttable means that the bond can be put or sold by the investor (you) before the maturity date. This generally happens when the interest rate increases in the market. The investor (you) can sell the bond back to the Bond issuer and get the face value back.

Puttable bonds work in favour of the investor (you), not in favour of the bond issuer.

Convertible & Non-convertible: Convertible bonds are corporate bonds that can be converted into a predetermined number of shares of the issuing company. Non-convertible means the bond can’t be converted into shares.

Transferable & Non-transferable: Transferable means the bond can be transferred from one person to another person. Non-transferable means the bond can’t be transferred to another person.

Negotiable & Non-negotiable: Negotiable means the bond can be easily transferred to another person. For example, the bearer bond. Non-negotiable means the bond can’t be easily transferred to another person.

Types Of Bonds

There are quite a few types of Bonds depending upon the issuer. The types are given below.

  • Government bonds : These bonds are issued by the Government of India. Hence, they are safe and risk free investment. They provide guaranteed returns and they are suitable for low-risk investors.
  • Municipal bonds : These bonds are issued by the State Government or the local Government agencies. These bonds are also safe investment options as they are backed by the State or local Government.
  • Public sector bonds : These bonds are issued by the Government affiliated organisations. These bonds are also safe investment options as they are guaranteed by the Government.
  • Corporate bonds : These bonds are issued by big companies. They offer higher returns but the risk will also be high. This is suitable for high-risk investors.

Where Can You Purchase The Bonds?

In general, you can purchase the bonds from the following two places.

  • Primary market
  • Secondary market

Primary Market: Primary market is the place where you can purchase the bond when it is first issued during the subscription period.

Example: : Let’s assume that the Government announces that it is going to issue a new bond during the second week of April and that you can purchase it from a list of specified Banks. In this example, the primary market refers to the Banks.

Secondary Market: Secondary market is nothing but the Share Market where you can purchase the past issues of the bond. For any reason, if you are unable to buy a bond on the primary market during the initial subscription period, then you can try to purchase them on the secondary market.

This is also the place where you can sell the bond before it’s maturity date. NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are examples of secondary market.

How Do You Purchase The Bonds?

You can purchase the bonds either directly by yourself or through an agent.

You can purchase the bonds using one of the following methods.

  • Cash (up to a certain limit).
  • Cheque.
  • Demand Draft.
  • Online (electronic).

When you purchase a bond, you can keep it in one of the following modes.

  • Physical form (bond paper).
  • Demat form (online)

Death Of The Bond Holder

Unfortunately, if you die during the tenure of the bond, then the bond will be transferred to your nominees or legal heirs. After that, your nominees should hold the bond till early redemption period or till maturity date.

Your nominees will receive the coupon payments (if any) at periodic intervals and the face value on the maturity date.

FAQ About Bonds

Is there any Pre-Mature Closure facility available in Bonds

Pre-mature closure rules will be different for every bond. Few bonds may provide pre-mature closure options. Few bonds may not provide this option at all. So, you need to check the rules before investing.

In general, for most of the bonds, if you close pre-maturely before the maturity date, then you may need to pay Capital Gains Tax (CGT).

Is there any Loan Facility available in Bonds

In general, the bonds can be used as a collateral security to get loan from the Banks, Financial Institutions and Non-Banking Financial Companies (NBFC). But, the rules will be different for every bond. So, you need to check the rules before investing.

Is there any Nomination Facility in Bonds

Nomination facility is available on all the bonds. You can nominate one or more people as your nominees. Also, you can change nominations at any time during the tenure of the bond.

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You can start invest in mutual funds through SIP with the following Mobile apps with Zero commission charged. Please click on the Image to open the account today with free of cost and start your first SIP today.

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Thanks for reading this blogpost. Please go through our other financial blogpost to have a complete end to end information of various investment Ideas. If you like this blogpost please share with your social media profiles and with friends. Thanks once again.