34 SGB issues coming up for premature redemption: Should you redeem or hold?

SGBs are government-backed securities issued by the RBI, introduced in November 2015. Since then, they have been offered in 67 tranches.

These bonds have a tenure of eight years with a mandatory lock-in period of five years. While SGBs are listed on the stock exchanges, they typically see low trading volumes. To provide liquidity, the RBI offers a buyback facility at the end of the fifth, sixth, and seventh years.

For example, the RBI has notified the redemption price of SGB 2019-20 Series V-Issue dated October 15, 2019, due on April 15, 2025, at Rs 9,069 per gram. The series was issued at the price of Rs 3,785 in October 2019.

Should you withdraw or stay invested?

SGBs allow investors to earn interest while enjoying tax-free capital gains.

It's important to note that capital gains from SGB are tax-exempt if you redeem the units through the RBI’s premature exit window. However, if you miss this opportunity and sell your SGBs on the stock exchange instead, the capital gains will be subject to tax.

According to Saurav Ghosh, Co-Founder, Jiraaf, an online bond platform, investors must consider the appreciation of gold price in the future and the uncertainty associated with other investment options before making the choice.

“SGBs are sovereign-backed and offer an additional 2.5 percent yield above the price of gold. While the gold price movement is difficult to predict, in an uncertain environment, prices have always moved up. Given the uncertainty in the wider markets, especially in equities, where the near- to medium-term returns look muted, SGBs continue to exhibit a very lucrative risk-reward ratio,” said Ghosh.

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Shweta Rajani, Head - Mutual Funds at Anand Rathi Wealth, also suggests that while the recent rise in gold prices makes early redemption tempting, investors should hold their SGBs till maturity (eight years).

“Investors will also continue to earn 2.5 percent annual interest (paid semi-annually) on the face value, hence, allowing the investment to have fixed income and gain benefits of gold price appreciation,” Rajani added.

Are there any alternatives to SGBs?

While it is difficult to compare SGBs to other gold investment options directly, alternatives are available, such as gold exchange-traded funds (ETFs), gold mutual funds, and physical gold purchases.

“However, these options do not provide the same advantages as SGBs. Since the SGB scheme is not expected to return, you'll need to consider these other alternatives if you wish to gain exposure to gold,” said Anand K. Rathi, Co-founder of MIRA Money.

Amid the continuous rise in domestic gold prices, the central government in the Union Budget 2025 discontinued the SGB scheme, citing the high cost of borrowing associated with the instrument.

According to the India Bullion and Jewellers Association (IBJA), Fine Gold (999) traded at Rs 93,350 per 10 gm level on April 11.

Vivek Banka, Co-Founder, GoalTeller, a financial advisory firm, says that over the past few months, gold has emerged as a great alternative and safe haven to practically all other asset classes that have been reeling under immense pressure due to the tariff war started by US President Donald Trump.

“Both gold ETFs and gold funds can be good alternatives for individuals who seek to either have a fresh exposure to the yellow metal or are looking for reinvestment options from their SGB monies that come out,” Banka said.

In the last Union Budget (July 2024) one helpful step that the government took to make gold ETFs and gold funds relatively more attractive was to make their tax treatment more efficient. These instruments, which were earlier taxed at slab rates, are now taxed at 12.5 percent if held for more than 12 months in the case of gold ETFs and 12.5 percent if held for more than 24 months in the case of gold funds.

Should you go aggressive on gold?

The current environment remains highly uncertain across asset classes, including equities and commodities. While the tariff war and its resolution remain in the works, it would be important for investors to plan for volatility while moderating return expectations in the near term.

Gold has traditionally proven to be a good asset class during times of high uncertainty.

In India, gold prices often perform well, primarily due to the depreciation of the Indian Rupee (INR). As a global commodity, gold is a good hedge against inflation and geopolitical uncertainties, though these situations do not arise frequently.

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“Therefore, it is generally not advisable to be overly aggressive in investing in gold. A prudent approach would be to keep your gold investments to about 5-10 percent of your overall portfolio,” said Rathi.

Anand Rathi Wealth’s Rajani believes that gold is a defence asset and can provide an investor with diversification and hedging benefits.

How to redeem your SGB units?

To tender your SGB units, contact the bank, post office, or the agent through whom you originally purchased the bonds. Be sure to submit your redemption request at least 10 days before the interest payment date. The RBI begins accepting premature redemption requests one month prior to the coupon payout date.

The redemption price is calculated as the simple average of the closing gold prices published by the IBJA for the previous week (Monday to Friday). Once processed, the redemption proceeds are credited directly to your bank account.