Investors in the Sovereign Gold Bond (SGB) 2021-22 Series-V have got a huge boost since the RBI has not only announced early redemption but also announced gold bonds after 5 years.
The RBI has fixed the premature redemption price at ₹15,295 per SGB unit as compared to the original issue price of ₹4,790. Investors who bought the bonds online and received the ₹50 discount had an issue price of ₹4,740 per unit.
Based on the discounted issue price, the capital appreciation works out to approximately 222.67%. Even when compared with the regular issue price of ₹4,790, the gain is around 219.31%.
Importantly, these figures are the increase in the bond's redemption value and do not include the 2.5% annual interest paid to SGB investors.
RBI allows premature redemption after five years
The SGB 2021-22 Series-V was originally issued on 17 August 2021.
Under the Sovereign Gold Bond scheme, bonds normally have an eight-year maturity period. Investors can have a premature redemption after the completion of the fifth year if the redemption is done on an interest payment date.
The RBI said the premature redemption for this particular tranche was due on August 17, 2026.
The redemption price has been calculated using the average closing price of gold published by the India Bullion and Jewellers Association (IBJA) for the three preceding business days -- August 12, August 13 and August 14, 2026.
How much did SGB investors gain?
The numbers show how gold prices rose so rapidly during the five-year holding period.
Particulars Amount
- Original issue price ₹4,790 per unit.
- Online purchase discounted price ₹4,740 per unit.
- Premature redemption price ₹15,295 per unit.
- Gain vs ₹4,790 issue price 219.31%.
- Gain vs ₹4,740 discounted price 222.67%.
- Annual interest: 2.5%
An SGB unit represents a gram of gold. Therefore, an investor holding 10 units would receive ₹1,52,950 at the announced redemption price, after tax treatment and without any interest already paid.
The total return for an investor would also include the interest payments received during the holding period.
SGB investors also received 2.5% annual interest
One of the critical features of Sovereign Gold Bonds is that investors will get a fixed interest payment in addition to any appreciation in the underlying gold value.
SGBs have an annual interest rate of 2.5% based on the initial investment level. The interest is paid twice a year and is credited to the investor's registered bank account.
This means the overall return for the investor who bought the 2021-22 Series-V bonds consists of two components:
Capital appreciation based on the increase in gold prices. Periodic interest income at 2.5% annually.
The 222.67% figure should not be interpreted as the full return including interest.
What are the SGB redemption rules?
Sovereign Gold Bonds tend to mature after eight years from the date of issue.
However, the scheme allows for premature redemption after the fifth year. Redemption is allowed on an interest payment date.
Investors who do not want to redeem their bonds before the eight-year maturity can hold them.
With the flexibility of the current investment model, investors can exit the investment after five years or hold until maturity and make financial decisions on how much gold to invest in if they want to.
Tax treatment of Sovereign Gold Bonds.
Tax treatment is also a critical feature of SGBs
According to the applicable rules for the scheme, capital gains generated by redemption of SGBs by an individual are exempt from capital gains tax.
But the 2.5% annual interest is taxable according to the applicable provisions of the Income-tax Act.
The tax treatment can differ depending on whether the bonds are redeemed with the government or transferred into the secondary market. Investors should therefore check the latest tax provisions or consult a qualified tax professional before making decisions.
Why did Sovereign Gold Bonds start?
The Government of India launched the Sovereign Gold Bond Scheme in November 2015 as an alternative to physical gold.
Instead of buying and storing gold bars, coins or jewellery, investors could gain exposure to gold prices through government-backed securities issued by the RBI on behalf of the Government of India.
The scheme was also intended to reduce India’s reliance on imported physical gold and encourage households to shift some of their gold savings into financial assets.
Investors received gold-linked capital appreciation along with fixed interest, making SGBs different from physical gold.
Why were fresh SGB issues discontinued?
The government discontinued new Sovereign Gold Bond issuance in October 2023.
The decision came after the scheme had given them the purpose they had hoped for and the cost of servicing and managing the bonds had increased. Investors could also buy gold-linked investment products from Gold ETFs and digital gold.
But in this case, the cancellation of new issuance does not cancel existing SGBs.
Investors who own SGBs can continue to hold their bonds as per the applicable terms. Eligible investors can also use the premature redemption facility after the required five-year period.
What does this redemption mean for investors?
The SGB 2021-22 Series-V redemption also shows how strongly gold prices have appreciated since August 2021.
An investment in gold in the first place at ₹4,740 per gram at the online discounted issue price now has a redemption value of ₹15,295 per unit.
As well as the huge capital appreciation, investors also received 2.5% annual interest during the holding period.
However, the past returns should not be taken as evidence of future gold prices or returns on investment. Investors holding other SGB tranches should check their specific issue date, maturity date, applicable redemption window and the latest RBI notification before taking any action.
Comments
Please to leave a comment on this article.