SGBs: When should investors go for premature redemption vs when should you keep it until maturity? Expert shares tip

In April 2025, investors holding select Sovereign Gold Bonds (SGBs) from the 2017-18 series will have the option for early redemption. The bonds eligible for redemption include SGB 2017-18 Series III, IV, and V, with redemption dates scheduled for April 16, April 23, and April 30. These bonds were originally issued at prices varying from Rs 2,956 to Rs 2,987. Premature redemption presents a lucrative opportunity for investors, with potential earnings of up to 199%, excluding interest, depending on the specific series. 

In March, the central bank announced the final redemption price for SGB 2016-17 Series IV at Rs 8,624 per gram on March 17, 2025, which is approximately 193% higher than its issue price of Rs 2,943 per gram. Investors who held SGB 2019-20 Series IV, originally issued at around Rs 3,800 per gram, have the option for premature redemption at Rs 8,634 per gram on March 17, 2025.

When should investors go for premature redemption?

Saurav Ghosh, Co-Founder at Jiraaf, in a column on a news website, said the redemption price offered by the Reserve Bank of India is tempting for investors. However, they should note a few points before redeeming their SGB units.

He said: "Before rushing to redeem, investors must consider future gold price trends, alternative investment options, taxation, and risk factors."

According to his analysis, investors in need of funds for major expenses should consider premature redemption through the RBI for practical reasons. However, Ghosh mentioned that investors anticipating a decrease in gold prices or exploring other investment options may find it compelling to redeem their Sovereign Gold Bonds (SGBs) early. 

Despite these possibilities, Ghosh emphasized that holding onto SGBs until maturity offers a higher probability of yielding better returns.

Ghosh explained that long-term investors seeking stability should hold onto their SGBs until maturity, as they provide zero capital gains tax and a consistent interest income. Holding until maturity allows investors to continue earning interest and benefit from tax-free capital gains, making it a suitable strategy for preserving long-term wealth.

Additionally, Ghosh pointed out that investors expecting higher gold prices may also choose to hold onto their SGBs until maturity. In the event of prolonged high inflation or continued global instability, the value of gold could potentially appreciate further.

Early redemption option

Investors holding Sovereign Gold Bonds (SGBs) can opt to redeem their bonds before the 8-year tenure has ended, starting from the fifth year after the date of issue. Early redemption is available on specific coupon payment dates established by the Reserve Bank of India (RBI).

To initiate early redemption of SGBs, investors must submit a redemption request at least 30 days prior to the designated coupon payment date through their issuing bank, post office, or Stock Holding Corporation of India Limited (SHCIL). The redemption price will be calculated based on the average closing price of 999-purity gold over the preceding three business days, using rates provided by the Indian Bullion and Jewellers Association (IBJA).

Early redemption of Sovereign Gold Bonds is permitted after five years from the issue date, subject to specific coupon payment dates. Investors can adhere to the RBI's guidelines and submit redemption requests in a timely manner through their issuing bank or authorised agent.

Taxation on redeeming SGBs

According to Ghosh, one of the main benefits of Sovereign Gold Bonds is that any profits made when redeeming them, whether at maturity or through early exit via the RBI, are completely exempt from tax, making them a highly efficient way to invest in gold.

He emphasized that there is no capital gains tax when redeeming through the RBI's premature exit option after five years.

If the bonds are sold on exchanges within 12 months, Short-Term Capital Gains (STCG) will apply, with gains taxed according to income tax slab rates. For holdings of over 12 months, Long-Term Capital Gains (LTCG) will be taxed at a fixed rate of 12.5% without indexation.

If held until maturity (8 years), the Sovereign Gold Bonds become entirely tax-free, offering investors a particularly attractive advantage.

Redemption pressure on govt

The redemption of Sovereign Gold Bonds issued in 2017 will cost the government over Rs 7,500 crore, with bonds of 8.41 tonnes coming due in 2025, according to reports.

According to data from the World Gold Council, bonds totalling 8.41 tonnes of gold will reach maturity this year. The current rate of gold, at approximately Rs 9,000 per gram, has considerably increased from the issue price of Rs 2,975 per gram in 2017, resulting in a 200 per cent return for investors.

Launched in 2017, the SGBs were part of 14 tranches and offered investors an interest rate of 2.5 per cent, paid bi-annually. These bonds have now matured, adding to the government's liabilities in the current financial environment. 
The total redemption cost is calculated at Rs 7,569 crore, reflecting the heightened gold prices that have surged over the past eight years. These costs are a result of the government's issuance of 67 tranches of gold bonds between FY16 and FY24, with a total purchase of 146.96 tonnes by investors.