Unlocking the Secrets of Sovereign Gold Bonds: Past, Present, and Future!

What are SGBs? 

Sovereign Gold Bonds (SGBs) are a unique investment avenue that allows individuals to buy and hold gold in a financial instrument issued by the government. Essentially, SGBs represent a secure and interest-bearing way for investors to own gold without the need for physical possession. These bonds are backed by the Reserve Bank of India and offer an attractive alternative for those looking to diversify their investment portfolio with the stability of gold 

Sovereign Gold Bond Series III for 2023-24 Opens with Rs 6,199 Price Tag: Online Applicants Enjoy Rs 50 Discount! 

The latest round of Sovereign Gold Bond (SGB) Series III started on December 18, 2023, with a fixed price of Rs 6,199 per gram set by the Reserve Bank of India (RBI). Online applicants enjoy a special Rs 50 discount, bringing the issue price to Rs 6,149 per gram. One can pay in cash (up to Rs 20,000), demand draft, cheque, or through electronic banking. The SGB price is based on the average closing gold price of the previous three business days, from December 13 to December 15, according to the India Bullion and Jewellers Association Ltd (IBJA).  SGBs are open to residents like individuals, HUFs, Trusts, Universities, and Charitable Institutions. The bonds, in grams, have an 8-year tenor, and you can opt for early redemption after the 5th year, coinciding with the interest payment date. 

The minimum investment is one gram, with maximum limits set at 4 kg for individuals, 4 kg for HUFs, and 20 kg for trusts per fiscal year. Joint holders follow the 4 kg limit applied to the primary applicant. 

Launched in November 2015, the SGB scheme aims to divert domestic savings from physical gold to financial savings. Available through various channels including scheduled commercial banks, Stock Holding Corporation of India (SHCIL), Clearing Corporation of India (CCIL), designated post offices, and stock exchanges, SGBs are exclusively for sale to resident individuals, HUFs, Trusts, Universities, and Charitable Institutions. 

The 64th tranche of Sovereign Gold Bonds, which was the first tranche for the 2023-24 financial year in June 2023, achieved a record-breaking number of subscriptions compared to previous tranches. A total of 77.7 lakh units were subscribed, establishing a new milestone. There was a clear demonstration of Indians' unshakeable faith in the value of gold as an investment. This was evident by their acquisition of an unprecedented 7.77 tonnes of Sovereign Gold Bonds (SGBs). The total worth of this substantial quantity amounted to ₹4,604 crores, marking a new pinnacle and underlining the increasing fascination with this precious metal. Notably, these bonds were purchased at the highest-ever issue price of ₹5,926 per gram. The quantity is triple of what was sold in 2022(2.56 tonnes) 

Sovereign Gold Bond 2017-18 Series XII: Early Redemption Set for Monday at Rs 6,199 per Gram! 

The Reserve Bank of India (RBI) has earmarked Monday, December 18, for the premature redemption of Sovereign Gold Bond 2017-18 Series XII, priced at Rs 6,199 per gram.  

Premature redemption under the SGB scheme is sanctioned after completing the fifth year from the issuance date, with this tranche issued by the RBI on December 18, 2017. These bonds, denominated in grams, have a tenor of 8 years, allowing for premature redemption after the 5th year, to be exercised on the interest payment date. 

XIRR% earned:  This specific SGB (Sovereign Gold Bond) from the 2017-18 Series XII was initially priced at Rs 2,890 per unit in December 2017. Each unit of the SGB represents one gram of gold. Now, when we calculate the absolute return by subtracting the initial price from the current value (Rs 6,199 - Rs 2,890), we get Rs 3,309. In simpler terms, this means your investment has grown by Rs 3,309 without considering the interest. In percentage terms, this absolute return is around 114.5%, showing a solid increase in value since the issuance, and this excludes the semi-annual interest of 2.5 %p.a. 

Considering SGB Investment? Details of SGB one should know of: 

Interest Payment Details for Sovereign Gold Bond Subscription Amount. 

As per procedural guidelines, applicants receive interest on the subscription amount at the savings bank rate until the date of allotment. The interest, set at 2.5% and paid semi-annually, is electronically credited to the bond holder's bank account by the RBI on the due date. For bonds held by depositories, interest is managed by them, ensuring electronic crediting to the account holders on the designated date. 

Tax Advantages and Cost Considerations. 

SGBs, with an eight-year tenor and an option for premature redemption after the fifth year, present tax advantages. Long-term capital gains are taxed at 20%, offering indexation benefits when redeemed after five years but before maturity. Interest on SGBs is taxable as income from other sources, with no TDS on bonds. Maturity proceeds are tax-free if held until maturity while selling before maturity attracts capital gains tax. Currently one of the only asset classes in the country providing an exemption from long-term capital gain tax.  Compared to the approximately 10% initial cost of acquiring physical gold, SGBs prove cost-effective with no entry cost or GST. 

Suitability and Approach for Investment in SGBs. 

Given the potential volatility of gold returns, aligning SGB investments with long-term goals (7-8 years or more) is advisable. Investors can roll over holdings, and premature withdrawal is possible after five years. Exiting through the secondary market involves liquidity and price risks. Strategic allocation, considering a maximum of 10% for all long-term goals into SGBs, is recommended.  

Returns and Reinvestment Considerations. 

SGB returns are market-linked, dependent on gold prices at maturity after eight years. A yield of 10-14 % p.a. is easily observed. 

 Investors earn a fixed interest of 2.5% per annum, paid semi-annually with no compounding. Reinvesting half-yearly interest is crucial, considering the relatively low amounts. It's essential to manage SGB investments with a focus on overall asset allocation and understanding associated risks. 

Double-digit returns likely on Sovereign Gold Bonds maturing next year; how much will early SGB investors get? 

Is It a Good Time to Invest in Sovereign Gold Bonds (SGB)?  

Since 2019, gold has exhibited favourable returns, drawing an increasing number of investors who seek to capitalize on its upward trajectory. The first tranche of SGBs in 2015 was issued at Rs. 2,684/gm. With an 8-year tenure ending in Nov 2023, the investor got maturity value back with no capital gains tax! An investor made a return of 12.92% CAGR, that too tax-free! 

(It's important to note that gold is a volatile asset, and this positive trend was interrupted by the pandemic years of 2020 and 2021. One needs to always balance one’s portfolio with diversification to hedge their risks.) 

SGBs are one of the best investment bets if one has a time horizon for 8 years, to enjoy its tax benefits. While the interest income of 2.5% is taxable, the long-term capital gain being exempt makes this asset stand out among its peers! While LTCG is 20% on most asset classes like physical gold, and real estate and 10% on Equity and Debt MFs, SGBs provide an investor the edge! 

 The initial tranche that matured on November 30 yielded an impressive net return of 12.92% per annum, including fixed interest payments. The question now is, will this trend continue? 

Expected Returns from Sovereign Gold Bond Schemes. 

The second tranche of Sovereign Gold Bonds, issued at Rs 2,600 per gram in February 2016, is set to mature in February next year. The redemption price, determined by the RBI based on the average closing gold price of 999 purity in the week before maturity, is expected to be around Rs 6,176 per gram. While the exact maturity price will be announced later, this estimate considers the current gold prices. The second tranche also offered a fixed interest rate of 2.75% per annum on the initial investment, paid half-yearly. If you invested Rs 1 lakh in these bonds, you would receive approximately Rs 2.38 lakh at maturity in February, including the last semi-annual payout at the rate of 2.75% per year, earning you Rs 1,375 every six months for the entire eight-year tenure. 

Returns from the Sovereign Gold Bonds maturing in 2024. 

In terms of XIRR or Extended Internal Rate of Return, the second tranche of the Sovereign Gold Bond will offer 13.44% returns at the current gold price. This will come down or go up if the gold prices fall or rise closer to the maturity date. 

During the same period (January 1, 2016, to December 18, 2023), the Nifty50 index has generated around 13.2% returns while large-cap mutual funds have given 13.03% returns. 

Similarly, the third tranche of the Sovereign Gold Bond was issued at Rs 2,916 per gramme in March 2016. Assuming the maturity price of Rs 6,176 per gramme, your Rs 1 lakh would have grown to Rs 2.13 lakh in eight years. So, you will get 12% returns from your investments. 

Should you invest in the Sovereign Gold Bonds? 

What makes the Sovereign Gold Bond a unique investment option? SGB enjoys multiple advantages — a hedge against inflation, a safe-haven asset, and an additional interest rate on your investment. However, do keep in mind that the interest rate is not fixed. After a few initial tranches, the central bank lowered the interest rate to 2.5% from 2.75%. 

Moreover, if you invest in SGB online, you will get a discount of Rs 50 per gramme. 

If you purchase Sovereign Gold Bonds and keep it until maturity in the eighth year, you will be eligible for a 100% capital gains exemption. There is a lock-in period of 5 years, if you sell your Sovereign Gold Bond after 5 years and before maturity, you need to pay a long-term capital gain of 20% with indexation. 

If one is planning to gift or use gold during marriage and has a time horizon of at least 5 years (although eight years is the lock-in period) then one can explore SGB to buy high purity Gold in electronic form. Indexation benefit, tax-free capital gain, and 2.5% annual interest (interest payout is taxable as per slab) are additional benefits of SGB, depending on one’s holding period and financial goals one can hold 5-10% of their portfolio into SGB. 

Sovereign Gold Bonds (SGBs): A Quick Guide to Applying and Important Considerations. 

If you're interested in buying Sovereign Gold Bonds (SGBs), here's what you need to know about the application process: 

• Application Submission: To purchase SGBs, you can go through agents or receiving officers. However, make sure to submit your application at designated branches during regular business hours on the specified membership week outlined by the RBI and the Government of India. Use the prescribed application form A for subscription. 

• PAN Card: Ensure that your application includes the PAN details issued by the Income Tax Department. The necessary details will be collected as needed. 

• Investor ID: Obtain a unique investor ID from RBI's e-Kuber while applying for SGB. If you already have an investor ID from a previous investment tranche, provide the same when making subsequent applications. 

• Existing Investor ID: The receiving officer must provide details of the existing investor ID when accepting the application. Failing to do so may result in the rejection of the application. 

• Payment Options: Payments for SGBs can be made in cash (up to Rs. 20,000) or through cheque/demand draft/electronic banking in Indian Rupees. Ensure that the cheque/demand draft is in favour of the receiving officer. 

• Complete Application: Make sure your application is complete in all respects, as incomplete applications may be rejected. 

• Investor's Email ID: Receiving officers can offer online application services for better customer convenience. It's their responsibility to ensure all relevant details are provided for capturing applicant information. 

• Acknowledgement Receipt: Upon receiving a complete application, the receiving officer will issue an acknowledgement receipt in Form B 

• Timely Submission: Meet all application requirements within the specified membership period to avoid rejection of incomplete applications. 

• Cancellation and Confirmation: Cancellation of bonds is allowed until the issue closes, but partial cancellation is not permitted. Receiving officers must enter or bulk upload subscription data accurately in the RBI's e-Kuber portal. Immediate confirmation and a confirmation scroll for file uploads will be provided. 

• Interest Payment: If your application meets all requirements, you are eligible for interest payment at the savings bank rate from the date of receipt of the application/fund until the date of allotment. No interest is payable if the application is rejected due to investor-related reasons.