InvestorQ : How can the government make a much bigger success of the Gold Bonds Scheme?
Angel dcosta made post

How can the government make a much bigger success of the Gold Bonds Scheme?

Anamika Sodhani answered.
3 years ago

To begin with, a lot of the basic features of the scheme will require tweaking if the scheme has to be successful. Demat gold will be bought only if investors find gold meaningful as an asset class. Unlike physical gold, demat gold does not have any sentimental attachment. Hence it will have to be purely sold as a proxy for gold as an asset class. That is where the pricing becomes critical. Firstly, pricing the GBS at a premium will not cut ice with buyers. It will have to be priced at a discount to the market price. That will be an incentive for people to buy gold bonds. Secondly, the big problem is that the rate of interest is denominated in rupees. That defeats the basic purpose of the entire scheme because the biggest risk to the price of gold stems from the appreciation of the dollar. Unless the government has a mechanism to absorb the currency risk that is implicit in gold prices, the scheme is unlikely to be attractive.

The government can also throw in some tax benefits to make the scheme more attractive. Apart from making interest free of tax, additional incentives like Section 88 can be extended to such schemes and they can be included within the overall limit. Such incentives will not only improve the effective yield to the end user but also encourage investors to consider the GBS as a serious instrument of tax planning. A few small tweaks could go a long way in making this scheme more user friendly and attractive to investors.