SGBs: The RBI has released the redemption price for early withdrawal of the Sovereign Gold Bond (SGB) 2019-20 Series IX, scheduled for February 11, 2025. As per government regulations, premature redemption of these bonds is allowed after five years from the date of issuance, in line with the interest payment timetable.
The option for early redemption of Sovereign Gold Bonds (SGBs) provides investors with flexibility to access their funds when necessary. However, it is important to carefully evaluate the possible downsides of premature redemption, including the risk of forgoing potential benefits from future gold price appreciation and interest payments for the remaining duration of the investment.
“The redemption price of SGB shall be based on the simple average of 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 Ltd (IBJA). Accordingly, the redemption price for premature redemption due on February 11, 2025, shall be Rs 8,499 (Rupees Eight Thousand Four Hundred and Ninety-Nine) per unit of SGB based on the simple average of closing gold price for the three business days i.e., February 6, February 7, and February 10, 2025,” RBI said in its notification.
Taxation and SGB early redemption
Although the tenure of SGB is for eight years, individuals have the option to redeem their bonds early after completing five years, but only on the next interest payment due date. This redemption does not generate any capital gains for the individual, as it is not considered a transfer under Section 47(vii) of the Income Tax Act.
This exemption from capital gains applies to bonds redeemed on maturity as well as those redeemed early after five years, whether they were originally subscribed to or purchased later from the open market.
If the SGB are sold on the stock exchange platform or transferred privately, any profits earned will be subject to capital gains tax. The tax rate applicable will depend on the duration of time the SGB is held. If sold within one year, it will be taxed at your slab rate. If sold after one year, it will be taxed at a rate of 12.50%.
Buying SGBs from secondary market
SGBs were debt securities, with each unit denoting a gram of gold. These bonds offer the flexibility of trading in the secondary market and the interest in SGBs is fixed at 2.5 per cent per annum on the amount of initial investment. Interest usually gets credited semi-annually to the bank account of the investor and the last interest is payable on maturity along with the principal.
The discontinuation of Sovereign Gold Bonds (SGBs) by the Central government was mainly driven by the high borrowing costs associated with the scheme. Introduced as part of the Gold Monetisation plan to reduce gold imports, SGBs became popular due to their government backing.
Although the SGB scheme has been terminated, investors still have several alternatives available to them for continuing their gold investments, providing flexibility and ease of access. Those interested in buying gold can explore options in the secondary market.
All SGB series released to date have been included in the secondary markets and are tradable in the cash segments of BSE and NSE. Investors can purchase and sell these series using their demat accounts, with each unit of an SGB representing one gram of gold.
One should remember when considering purchases from the secondary market, careful review of the maturity date of the securities is important. Bonds closer to maturity (8 years from the issue date) may offer higher yields but fewer interest payments. Detailed information on each issue, including specific maturity dates, can be found on the RBI website.
Keep in mind that Sovereign Gold Bonds (SGBs) offer 2.5% annual interest, paid semi-annually, which remains consistent even when purchased from the secondary market. However, it's important to note that interest is calculated based on the nominal value (issue price) rather than the purchase price, potentially resulting in a lower overall yield. For example, current 2031 SGBs are currently yielding about 1.4% due to their high market price.