The First Sovereign Gold Bonds Hit Maturity Milestone on November 30

Sovereign Gold Bonds, issued by the Reserve Bank of India (RBI) on behalf of the Indian government, are essentially government securities that are specified in grams of gold. The Indian Government introduced the Sovereign Gold Bond (SGB) Scheme in November 2015 as an option for investors seeking an alternative to holding physical gold. Investors are required to acquire these bonds at the issue price in cash, with the ability to redeem them for cash upon maturity.

Investors safeguard the quantity of gold they acquire, as the redemption value is based on the prevailing market price at the time of maturity. This option is deemed superior to holding physical gold, offering investors the benefit of capitalising on gold price appreciation while earning a fixed interest rate.

The first Sovereign Gold Bond (SGB) was launched on November 30, 2015, and, in accordance with the terms of the arrangement, these bonds are slated for repayment eight years from their issuance. Consequently, on November 30, 2023, the first tranche of SGB is set to mature. The current annual interest rate for SGB stands at 2.5% on the initial investment, with payments disbursed semi-annually.

The regulator has determined the redemption price of SGB based on the simple average of the closing price of 999-purity gold in the week preceding the redemption date, as reported by the India Bullion and Jewellers Association Ltd. (IBJA).

As outlined in a notification on November 24, the redemption price for the final maturity on November 30, 2023, is set at Rs 6,132 per unit of SGB, determined from the simple average of the closing gold prices during the week of November 20 to 24, 2023. The initial issuance in 2015 was priced at Rs 2,684. Investors in SGB 2015-I will receive an annualised return of 10.88%, in addition to an annual interest rate of 2.5%. It is worth noting that the initial issue initially offered a 2.75% annual interest rate, but it was subsequently revised down to 2.5%.

Thus, considering an individual in the 30% tax bracket, the series has yielded a Compound Annual Growth Rate (CAGR) of 12.28% over the span of 8 years, assuming the interest was reinvested in SGBs. These post-tax returns outperform many other investment options, including bank fixed deposits and even certain mutual funds. This underscores the effectiveness of SGBs as a sound investment that provides a buffer against market volatility.

How Are Sovereign Gold Bonds Taxed?

The 2.5% interest earned on your SGB holdings is fully taxable at your highest rate of tax. Therefore, if you are in the 30% tax bracket, you will be liable to pay taxes at the peak rate on the interest you receive. It is essential to note that there is no Tax Deducted at Source (TDS) on the interest, meaning you must report this income when filing returns and pay advance tax accordingly.

Sovereign Gold Bonds mature at the end of 8 years, and any capital gains arising during redemption are completely tax-free. This special tax benefit is a government initiative to promote gold bonds and encourage investors to transition from physical gold to gold bonds.

However, premature redemption of SGBs is not as tax-friendly. There are two ways to exit before maturity. Firstly, you can utilise the early redemption window available at the end of 5 years. The second option is to sell your gold bonds in the secondary market. All issued SGBs are listed on stock exchanges with a unique ISIN after 6 months from the issue date.

In both scenarios of premature redemption, capital gains will be subject to taxation. The standard taxation definitions of Short-Term Capital Gains (STCG, if less than 3 years) and Long-Term Capital Gains (LTCG, if more than 3 years) will apply. For STCG, tax is payable at the peak rate, while for LTCG, investors can pay tax at a flat rate of 10% or 20% after factoring in the indexation benefit.

Why Should You Consider Investing in Sovereign Gold Bonds?

Investing in SGBs eliminates concerns about the purity of the gold, a worry often associated with physical gold.

Apart from capital appreciation due to price fluctuations, Sovereign Gold Bonds also offer a fixed annual interest rate of 2.5% on the issue price. This interest is credited to the investor's registered bank account semi-annually. This stands as a notable advantage over physical gold, which only offers the potential for capital appreciation.

While there is a potential for capital loss if the market price of gold decreases, investors do not incur losses in terms of the units of gold they initially paid for.

As paper-based instruments, SGBs eliminate the necessity for storage and the associated costs, a feature not shared by physical gold. Moreover, unlike physical gold investments, SGBs spare investors from additional expenses like making charges and GST.

These bonds are either recorded in the books of the Reserve Bank of India (RBI) or held in a dematerialised (de-mat) form, eliminating the risk of loss or theft. Investors also have the flexibility to convert their holdings into a dematerialised form.

The purchase of these bonds provides flexibility, allowing investors to buy them online or offline at their convenience. Moreover, online purchases of SGBs through online payment methods offer a discount of Rs 50 per gram compared to the actual issuing price.

SGBs are open for purchase by resident individuals, Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable Institutions. However, NRIs and foreign institutions are not permitted to possess these bonds.

As discussed, the tenure of SGBs is 8 years, but investors have the option for premature redemption after the 5th year from the investment date.

These bonds are issued in denominations of one gram of gold and multiples thereof, with the minimum investment starting as low as one gram. The maximum subscription limit is set at 4 kilograms for individuals and HUFs and 20 kilograms for trusts and similar entities designated by the government each fiscal year.

Furthermore, these bonds offer greater liquidity compared to physical gold, as they can be bought or sold through stock exchanges.

To conclude:

While gold has demonstrated decent returns over the past decade, you should also know that it might not provide substantial returns consistently. However, gold can be an effective tool for portfolio diversification as it typically exhibits a negative correlation with equities.

The returns from the SGB 2015-I series underscore the potential of gold as a secure investment during uncertain periods and highlight the appeal of Sovereign Gold Bonds (SGBs) as an investment avenue.

As more tranches mature in the future, investors will find more reasons to reconsider and include gold in their asset allocation strategy. Opting for SGBs instead of physical gold would be a prudent choice for those who haven't allocated a portion of their portfolio to gold.

Depending on their risk tolerance and financial goals, investors may consider allocating up to 10% to 15% of their portfolio to gold through SGBs as they offer a secure investment avenue with higher overall returns.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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