Have Sovereign Gold Bonds Lost Sheen After Modi 3.0's Full Budget 2024-25

But this move by the finance minister, Nirmala Sitharaman, has now led to speculation that the central government may lower the issuance of Sovereign Gold Bonds (SGBs) .

The last issue of SGB (2023-24 Series IV) was in February 2024 at an issue price of Rs 6,263 per gram. For 2024-25, the RBI -- which is the issuing authority for SGBs on behalf of the RBI and announces the issuances of these bonds in four tranches in the financial year -- has made no announcement so far on the issuance of the SGB 2024-25.

Perhaps, the officials are reassessing the demand for SGBs considering various factors.

SGBs were launched by the government in November 2015 (as a part of the Gold Monetisation Scheme) at an annual interest of 2.75%, with a maturity of 8 years, and since then, the price of gold has more than doubled.

[Read: Why Gold Is Scaling New Highs]

The original issue of SBG will be due for maturity in the current financial year, and the liability of the government will be hinged on the price of gold in INR terms around the time of the maturity dates (based on the simple average of closing price of gold of 999 purity, of previous three working days published by India Bullion and Jewellers Association Ltd.).

Borrowing further through SGBs now is perhaps considered to be an expensive proposition for the government - as the fixed interest rate offered currently is 2.50% per annum (payable semi-annually on the nominal value) as well price per gram of gold has gone up considerably since the original issue.

Also, possibly it is perceived that after a cut in customs duty on gold, there may not be many takers for SGBs as Indians, who have a penchant for gold and consider it to be symbolic of Goddess Lakshmi, may consider buying physical gold. During festive and wedding season, as you know, there is a good demand for physical gold. Similarly, it is perceived that smart investors may opt for gold mutual funds instead of SGBs.

Are SGBs Still a Worthwhile Investment Proposition?

The drop in the price of gold due to a reduction in basic customs duty has somewhat weighed on the returns of existing investors.

That said, if the RBI makes SGB issuances in the current financial year, for new investors, it is a good opportunity to invest now. You will be earning a fixed interest of 2.50% from SGB until the maturity period of 8 years plus benefit from capital appreciation over the holding period.

You see, even though gold in INR term has fallen owing to price adjustment on account of duty cut, the following factors still make a case for investment in gold as an asset class:

- Looming geopolitical tensions (With the ongoing Russia-Ukraine war, plus Israel's war against Hamas. Few days ago, Hamas leader, Ismail Haniyeh was assassinated in Iran, which has deepened tensions in the Middle East)

- Geoeconomic fragmentation

- Increased incidences of climate shocks

- Potential supply chain disruptions

- Risks to the inflation trajectory

- The burgeoning debt-to-GDP ratio of many major economies -- higher than the pre-pandemic levels

Further, if major central banks begin to cut the policy interest rate, it will act as a catalyst for gold, as observed by the World Gold Council (WGC).

Recently, the European Central Bank (ECB) cut its policy interest rate from a record high. While the U.S. Federal Reserve has held the federal funds steady (5.25% to 5.50%), it has hinted at a rate cut as soon as September this year (if inflation and other macroeconomic factors permit). Jerome Powell, in his statement, expressed that policymakers are growing more confident that inflation is steadily moving towards the 2% target.

Against the backdrop of the above, international gold prices in U.S. dollar terms have already reported an uptick.

Revenue Secretary, Sanjay Malhotra, speaking to the media freshly said, "I want to assure that despite the rate reduction in gold import duty, the sovereign gold bonds nearing final redemption will still get at least 12 per cent total return, if not 12.7-12.8 per cent. Even 12 per cent return is not low." 

What About the Taxation of SGBs After Union Budget 2024-25?

The interest earned semi-annually on SGB is an income under the head "income from other sources" and taxed as per the income-tax slab of the assessee, i.e. at the marginal rate of taxation.

Further, after the changes in the capital gain tax made in the union budget 2024-25, the transfer of SGB on the stock exchange will not be subject to higher capital gain tax. The Short Term Capital Gains (for a holding period of less than 12 months) for listed financial assets is increased to 20% from 15% earlier. The Long Term Capital Gain (for a holding period of more than 12 months) will be taxed at flat 12.5% tax as per Section 112 of the Income Tax Act, 1961.

But if you decide to utilise the premature redemption window after 5 years with the RBI, as per the current tax rule, the sale proceeds will not be subject to Long Term Capital Gain Tax.

Similarly, if you hold on to the SGBs till the maturity period of 8 years, the capital gains arising therefrom will be exempt from tax, since it is not regarded as transfer for the purpose of capital gains.

Out of your total 10% to 15% allocation to gold in the portfolio, a small portion could be held in SGBs (if there are new issuances) and the rest in Gold ETF and/or Gold Savings Funds (which essentially are gold mutual funds).

Approach your investments sensibly recognising the tax implications, your risk profile, the broader investment objective, the financial goals you wish to address, and the time in hand to achieve those envisioned goals.

Be a thoughtful investor.

Happy Investing!

Join Now: PersonalFN is now on Telegram. Join FREE Today to get PersonalFN’s newsletter ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.