The Government will start issuing sovereign gold bonds -- investment instruments linked to the price of gold -- from November 26, and will start accepting applications for the bonds from November 5.

The scheme, which is being introduced to reduce the demand for physical gold, will have an annual cap of 500 grams per person while minimum investment allowed would be 2 grams, an official release circulated by the Finance Ministry on Friday stated.

“The bonds will be sold through banks and designated post offices as may be notified. The borrowing through issuance of the bond will form part of market borrowing programme of Government of India,” the release said.

Finance Minister Arun Jaitley had announced in this year’s budget the Government’s intention to launch a Sovereign gold bond as an alternative to purchasing metal gold.

The gold bonds will be issued by Reserve Bank India on behalf of the Government and will sold only to resident Indian entities including individuals, trusts and charitable institutions.

The issue and redemption prices of the bonds will be fixed in Indian Rupees on the basis of the previous week’s simple average of closing price of gold (999 purity) published by the India Bullion and Jewellers Association, the release said.

So, when the bonds are being purchased, buyers will have to pay a price based on the average of the gold price prevailing the previous week, and when they redeem it, the price would again be based on the average price of gold prevailing the week before the redemption takes place.

The interest on gold bonds shall be taxable as per the provision of Income Tax Act, 1961 and the capital gains tax will be the same as in the case of physical gold.

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