Sovereign Gold Bonds (SGBs) that are available on the exchanges are trading at a higher premium to their reference price.
For instance, on an average, the closing prices of the topmost 15 liquid SGB series were eight percent higher than their reference price, as of August 14, 2024. The price of gold with 999 purity, published on ibjarates.com, is the reference rate for SGBs.
Starting 2015, the Reserve Bank of India (RBI) has launched 67 SGB tranches and issued 14.7 crore units.
All the series were listed in the secondary markets and are available for trading in the cash segment of the BSE and the NSE. Investors can buy and sell them through demat accounts. In the absence of new issues, the demand for these bonds may likely go up, and this would lead to a further rise in the price of these bonds against the reference price.
For instance, the closing price of the most actively traded SGB series, SGB 2023-24, Series IV, on August 14, 2024, on the NSE was Rs 7,930 -- about 12 percent higher than the IBJA 999 purity gold rate of Rs 7,079.
SGB series have traded on premium to the reference rate since the beginning due to the additional coupon rate and the tax exemption upon maturity.
What are SGBs?
SGBs are government-backed gold bonds issued by the RBI. Unlike other gold asset classes like gold exchange-traded funds (ETFs) and physical gold, SGBs offer an annual coupon rate of 2.5 percent or 2.75 percent, which is an added advantage.
Bleak outlook for new SGB issuance
SGBs are in the spotlight after Union Budget 2024 cut customs duties on gold and silver to 6 percent from 15 percent. This led to a fall in gold and SGBs prices. Investors are worried that this could, in turn, reduce the gain from the SGBs that will mature in the upcoming months.
Also see: Will customs duty cut hurt investors in sovereign gold bonds maturing in 2024?
“There were rumours that the reduction of gold import duty were due to high bond returns,” says Deepak Jasani, Head Retail Research, HDFC Securities.
On July 25, Moneycontrol reported that the government might reduce or even discontinue the SGB scheme as they are turning out to be an expensive proposition.
As there is uncertainty on the future issuances of SGBs, investors who find SGBs as a good option to participate in the expected gold price upmove seem to be paying a premium to buy the current series of SGBs, adds Jasani.
Tax exemption on maturity an added advantage
SGBs score over other gold investment options, such as gold ETFs and physical gold, on taxation.
If individuals redeem their SGB investments at maturity (after eight years), they don't have to pay capital gains tax. Also, they are exempted from capital gain, if they redeem SGBs using the RBI’s premature withdrawal window at the end of the 5th, 6th, or 7th year.
However, if you sell your SGBs outside of this window or on the stock exchange, capital gains will be taxable. If SGB units are bought on stock exchanges and sold within 12 months, that shall be classified as short-term capital gain (STCG) and taxed at applicable slab rates. If SGBs are held for more than 12 months, the long-term capital gain tax is applicable at 12.5 percent (plus applicable surcharge and cess).
Eyeing liquidity
Liquidity or traded volume play an important role while buying SGBs on the exchanges.
See here: The actively traded SGBs on the NSE
Many SGBs suffer from low liquidity. You will get the desired price in the bonds with higher liquidity. The daily average traded volume of overall SGBs on both the NSE and the BSE was Rs 13.4 crore, over the last three months.
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