Outstanding units of Sovereign Gold Bonds (SGBs) worth Rs 96,120 crore issued by the government of India might take a hit, after the Union Budget 2024 cut customs duties on gold and silver to 6 percent, down from 15 percent earlier, bringing gold prices down.
Till date 67 tranches of SGBs have been issued since the first tranche was issued on November 30, 2015 by the Reserve Bank of India (RBI) on behalf of the Government of India. Data compiled by Moneycontrol pegs the total number of units (equated in tonnes) at 147 tonnes, valuing the issued units at Rs 72,274 crore.
Earlier this month, RBI announced Rs 6,938 per gram as the final redemption price for SGBs issued on August 5, 2016, implying a XIRR return of 12.6 percent. The tranche was issued at a price of Rs 3,119 per gram in August 2016. Gold price (as per the IBJA rate) corrected about 5 percent from July 22 to the maturity date of the SGB series.
Additionally, two SGB issues are maturing over the next six months.
Will Budget proposals impact SGBs?
Just after the government announced a customs duty cut on July 23, 2024, on gold from 15 percent to 6 percent, the price of gold fell. Since SGBs are linked to gold prices, the past tranches saw a drop of up to 6 percent in a day. Further, data shows that SGBs have shown more weakness since Budget Day.
Also read | Hindenburg report: Rs 41,814-crore mutual fund money riding on 10 Adani group companies
For example, SGB 2016-17 Series IV has dropped by 8 percent between July 22 to August 9, 2024. Other SGB tranches have also seen similar weakness in prices, impacting investors' returns.
SGBs coming up for redemption
Data compiled by Moneycontrol showed that there are two SGB issues - SGB 2016-17 Series II and SGB 2016-17 Series III -maturing over the next six months.
Even without considering the interest payout over the years, both these issues have more than doubled the initial investments made during 2016.
Further, in the next six months, there are 22 such issues, which would be eligible for premature redemption after having completed at least five years. To be sure, you can pre-maturely redeem your SGBs (with RBI) after the issue completes five years. SGBs have a maturity of 8 years.
Six SGB issues would be eligible for premature redemption on completing five years, four issues on completing six years and 12 at the end of seven years.
How have past SGB issues fared?
SGBs are not backed by physical gold. The objective of SGBs is to discourage people investing in physical gold and direct them to buy the paper gold. Even since their launch in 2015, the instruments have seen an overwhelming response.
In FY 23-24, Rs 27,031 crore was invested in SGBs, Rs 6,551 crore in FY23 and Rs 12,991 in FY22.
Also read | Do taxation changes in Budget 2024 call for a change in asset allocation?
So far, four issues of SGBs have matured since November last year. The first gold bond issued - Sovereign Gold Bonds 2.75% NOV 2023 - gave 12.9 percent returns to investors. Compared to this, gold exchange-traded funds (ETF) as a category have delivered 10.9 percent returns during the same period.
According to experts, SGBs are one the best investment routes in gold for individuals willing to remain invested for the entire eight-year maturity period.
What are SGBs?
SGBs are government securities denominated in grams of gold, and they are substitutes for holding physical gold. The bonds are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the bond is one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government per financial year.
All the SGB series are listed and traded in the cash segment of the BSE and NSE. Investors can buy and sell them through demat accounts. Liquidity has been an issue in most of the SGB series. Only six series were traded with a daily average volume of above Rs 5 lakh on the NSE.
In terms of tax treatment, capital gains from Sovereign Gold Bonds (SGBs) are exempt if you redeem your SGBs within the 21-day annual premature withdrawal window at the end of the 5th, 6th, or 7th year. This means you won't have to pay any capital gains tax on the profits made from the sale of your SGBs.
However, if you sell your SGBs outside of this window or on the stock exchange, the capital gains will be taxable according to your income tax slab.
If individuals redeem their SGB investment at maturity (after eight years), they are not liable to pay capital gains tax.
Further, the periodic interest payments you receive on your SGBs are taxable as per your applicable income tax slab.
“Remember, to avail of the tax exemption on capital gains, you must redeem your SGBs within the designated 21-day window. Also, if you miss this window or sell your SGBs on the stock exchange, the capital gains will be taxable,” said Viral Bhatt, Founder, Money Mantra.
Since February of this year, there hasn't been a new issue of SGB. On July 25, Moneycontrol reported that the government might reduce or even discontinue the Sovereign Gold Bonds scheme, citing concerns that it's too costly.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
