The Reserve Bank has fixed the premature redemption price for the sovereign gold bond (SGB) at `9,600 per unit for redemption on April 28 — a full 109% appreciation over the investment made in 2020-21. Last week, the retail price of the safe haven asset had crossed the psychological `10,000/10 grams mark.
With 2.5% annual interest, a holder of the SGB would make an 18% average annual return from the investment. The upcoming redemption next Monday is of the SGB series I of 2020-21 and was issued on April 28, 2020.
The SGB calculates the redemption price based on the simple average of the closing gold price of 99.9 purity over the preceding three business days, as published by the India Bullion and Jewellers Association. Accordingly, the prices from April 23, 24, and 25, 2025, are considered to arrive at the final redemption figure of `9,600/gram.
Since the inception of the SGB scheme way back in November 2015, under the gold monetisation scheme to offer an alternative investment to physical gold, close to as much as 146.96 tonnes of gold was issued/raised through 67 tranches, amounting to Rs 72,274 crore. Since July 2024, when the tax on gold imports were slashed by 9 percentage points to 6%, the RBI has announced premature redemption for SGBs issued between 2017 and 2020.
Earlier last week, the RBI had also announced premature redemption prices for two other SGB series —series IV of 2017-18 and series II of 2018-19 both of which became eligible for early redemption last Wednesday. These bonds, issued on October 23 of their respective years, had similarly completed their minimum five-year tenure, allowing investors to exit at the next interest payment cycle.
Under the government guidelines, SGBs offer investors an early exit option after completing five years from the date of issuance, even though the overall maturity period is eight years. For series I of 2020-21, issued on April 28, 2020, the five-year lock-in ends this month, enabling eligible bondholders to redeem their holdings ahead of maturity.
Sovereign gold bonds continue to be a popular investment option for individuals looking to gain exposure to gold without the challenges of physical storage. The scheme provided an annual interest rate of 2.5% and potential capital growth tied to gold prices. SGBs have an eight-year term, with the option for investors to redeem them early starting from the fifth year. Early redemption is permitted only on particular interest payment dates, which occur twice a year. Any profits realized from redemption are exempt from taxes if held until maturity.
Apart from offering assured annual interest of 2.5% on the initial investment, SGBs also enjoy capital gains tax exemption if held till maturity, making them a tax-efficient tool for long-term investors.
If the early redemption window is missed, investors will not lose their investment as the bonds will continue to accrue an annual fixed interest rate of 2.5% until it matures in eight years. Investors also have the option to sell the bonds in the secondary market at current market prices.
The interest earned on SGBs is taxable as its classified as income from other sources and taxed according to your applicable income tax slab rate, meaning it is added to your total income and taxed at the marginal rate. But if redeemed prematurely through the RBI’s designated window of five years of holding—the proceeds are fully exempt from long term capital gains tax. But if you choose to sell SGBs in the secondary market instead of using the RBI redemption route, you will have to pay capital gains tax along with applicable surcharges.
Two SGBs launched in 2016 have already matured in 2024.
Since July 2024, the government has redeemed six tranches of SGBs, with 61 tranches remaining outstanding, and the final redemption scheduled for February 2032.
The July 2024 budget projected that government liabilities on gold bonds would be Rs 85,000 crore by the end of this fiscal, almost nine times the number in FY20. The duty cut led to a massive 6% plunge in domestic gold prices hugely benefitting the government in redemption payout. Yet the first redemption gave the investor a premium of 122%.
In the first-ever SGB redemption on 5 August 2024 (issued on August 10, 2016) the RBI bought back 3.75 tonne and another 3.6 tonne on 23 September 2024 in the second tranche. In the third redemption it brought back 8 tonnes.
The SGBs yield an annual interest of 2.5% payable half yearly and the redemption price is the average weekly price of the metal in the previous trading week. The interest is taxable but no capital gains tax.