The Reserve Bank of India has issued a calendar for the premature redemption of 34 tranches of Sovereign Gold Bonds (SGBs) during April to September this year. These bonds were issued between October 2017 and September 2020. As gold prices touch a record high because of global economic uncertainties, investors can consider a partial redemption and retain the rest for long-term gains.
The issue price of bonds for the 2017-18 Series III to Series IX ranges between Rs 2,956 and Rs 2,964 per unit. For bonds issued in 2020-21 (series I to VI), the price ranges between Rs 4,639 and Rs 5,117 per unit (or per gram). The redemption price of SGB is based on the simple average of the closing gold price of 999 purity of the previous three business days from the date of redemption, as published by the India Bullion and Jewellers Association. Gold prices touched Rs 9,000 per gram this week.
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Hold or redeem?
The decision to hold or redeem depends on individual financial goals. Abhijit Roy, CEO of GoldenPi , an online platform to invest in bonds, says those who seek long-term tax-free gains, stable interest income of 2.5% annually, and expect gold prices to rise further, should hold on to the bonds. Those who need liquidity can redeem. “The smart move will be to consider a partial redemption — cash out a portion while keeping some SGBs for long-term benefits,” he adds.
Since January this year, gold prices have risen 19%, and in the last six months, prices have risen 20%. In the last one year, domestic gold prices have risen around 32%. For five years, the prices have gone up by 17%. Investing in gold acts as a hedge against inflation and also as an insulation against any global political or economic uncertainties.
Retaining the SGBs until maturity for eight years allows investors to qualify for exemption from capital gains tax on the final redemption amount. Investors can go for premature redemption after the fifth year. However, the gains at the time of premature redemption will be taxed. To redeem, investors have to submit a request to the bank, post office, NSDL, CDSL, or Stock Holding Corporation of India 30 days before the scheduled redemption date.
Also read: Govt issues 67 tranches of Sovereign Gold Bonds till FY25
Buying from the secondary market
While no new SGBs are being issued, investors can consider buying these from the secondary market if they believe gold prices will continue to rally from this point. Buying SGBs from the secondary market at a premium can be a good move if an investor plans to hold till maturity for tax-free capital gains and 2.5% interest income. However, they should consider liquidity risks and the possibility of short-term price corrections before purchasing at a high premium.
Investors must compare the price of the bonds with the current gold price and ensure the premium isn’t too high. They should keep in mind that bonds closer to maturity provide quicker tax-free exits. Moreover, SGBs have low trading volumes, so large purchases may not be easy.
Suresh Darak, founder, Bondbazaar, says the most important factor at this point for any investor purchasing SGBs from the secondary market is the maturity period. Investors should evaluate the rapidly evolving geopolitical conditions and their impact on gold, and have a view on when such conditions are likely to prevail. “Investors should check the liquidity of the particular SGB, and the difference in its price versus the prevailing spot gold price to determine the premium or haircut that they are incurring,” he adds.
Also read: Selling old gold? Pay long-term capital gains tax on proceeds
Gold outlook
Gold prices in India are driven by two factors: The price of gold in international markets, which is denominated in dollars, and the dollar-rupee exchange rate. Global prices have risen beyond $3,000/oz because of volatility driven by the geopolitical conditions and evolving trade policies. Moreover, the rupee has depreciated against the US dollar due to local economic as well as global factors. Experts say if uncertainty continues, then gold prices may continue to rise. So, an allocation of 10-15% in the metal can be a good portfolio diversifier.