 "Looking to invest? Why you should buy gold bonds from secondary market")
Investors who opted for the first batch of sovereign gold bonds ( SGB) and held to its maturity are set to reap major gains as prices of the yellow metal have more than doubled in the last eight years.
Reserve Bank of India issued the first tranche of SGB in November 2015 for Rs 2,684 per gram. The redemption price of this tranch is yet to be declared. However, recently, the RBI declared a redemption price of Rs 6,116 per unit for premature redemption of 2017-18 series 1 SGBs. Apart from this price appreciation, the investors would also receive an annual interest of 2.75% annually.
"We can expect the first tranche's redemption price to be around the same. Therefore, an investment of Rs 1 lakh in the first tranche of SGB would now fetch about Rs 2.30 lakh at close to 10.8% XIRR, along with a cumulative interest of approximately Rs 23,000," said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
How much are the gains?
How much are the gains?
Here is a simple calculation of SGB FY15 – Sr-1 from Sriram BKR, Senior Investment Strategist at Geojit Financial Services:
Issue price was Rs.2684/gm. Date: 30.11.2015. Interest: 2.75%. Purity: 999
If one were to invest for 50 gms, the cost comes to Rs 134200.
~At the market rate of Rs.6137 / gm as of 31-10-23 (as per IBJA), the current value comes to Rs 306850 (for 50 gms).
~ SGB series age: 7.92 years, fetching an interest of around Rs 29221 (including the accrued portion if any).
Hence the total value of SGB comes to Rs 336071.
Overall Gains: Rs 201871 ; Break-up: Interest + Capital Gains = 29221 + 172650
Effective CAGR: 12.99%.
Point to note: The actual redemption price will be determined by the simple moving average of gold's closing price, published by the India Bullion and Jewellers Association (IBJA).
SGBs are issued by the RBI and are a safer, more reliable substitute for holding actual gold. These bonds track the price of one gram of gold. They are issued in batches called 'tranches' on specific dates during the year. These gold bonds usually have an eight-year maturity period. You also receive a further 1.25 per cent interest every six months (2.50 per cent per annum) on the issue price first launched by the RBI, something physical gold and gold funds don't offer.
" Investor benefits from gold price appreciation and also from this bond interest" said Prithviraj Kothari, MD CEO of RiddiSiddhi Bullions Limited. In addition, it's a sovereign credit and has a tax advantage if held to maturity, while jewellery investment involves making charges and locker storage.
The maiden tranche raised Rs 245 crore from investors back in 2015, and only six per cent of the SGB investment was withdrawn prematurely.
"People who invested in the first series of Gold Bonds are about to get bumper returns on their investment. The first Gold Bonds were released in Nov 2015 at Rs. 2,684 per gram. Their redemption is due in end of Nov 2023 and the current gold price is around Rs. 6,200 per gram. With the value doubling in more than 8 years, the investors have earned an annual growth rate of almost 11%. Coupled with 2.5% of interest which is paid annually, the returns of the first bond are a phenomenal 13.5%," said Ankit Jain, Partner, Ved Jain & Associates.
The only tax you need to pay is on the interest income you earn twice a year
"For example, if an investor invests Rs 50,000 in Sovereign Gold Bonds with a 2.5% interest rate, they will earn Rs 1,250 in yearly interest. This interest is paid-out on a semi-annual basis and added to the principle amount of Rs 50,000. Rest is determined by simple average of the closing gold prices with 999 purity over the three preceding business days from the redemption date, as reported by the India Bullion and Jewellers Association Ltd (IBJA)," explained Gurmeet Singh Chawla, Director, Master Capital Services Ltd.
From a taxation perspective, the gains earned by an individual from a sovereign gold bond at the time of redemption or maturity are totally exempt.
For example, if someone invested Rs 1,00,000 in 2015, he would receive almost Rs 2,30,000 on redemption. The capital gains of Rs 1,30,000 on redemption would be exempt in his hands and no tax is required to be paid.
The interest earned up till the date of maturity would still be taxable.
What if you redeem it before eight years?
"Interest income generated from bonds is subject to taxation under the category of 'Income from Other Sources.' However, when these bonds are redeemed at the conclusion of their 8-year term, the received amount becomes exempt from taxation. In the event of an early exit from Sovereign Gold Bonds (SGBs) prior to the completion of the specified tenure, any amount acquired will be subjected to taxation as Long-Term Capital Gains, following the regulations outlined in the Income Tax Act of 1961," said Pallav Pradyumn Narang, Partner, CNK.
How are the returns linked?
The returns on these bonds are linked to the price of gold, so if the price of gold has increased since they were purchased, investors can expect to see a good profit when they mature. As per the RBI, the gold bonds will be redeemed in Indian rupees at maturity, with the redemption price based on the average closing price of gold of 999 purity over the previous three business days from the day of repayment.
Should you still invest in SGBs?
"While it's true that SGBs have become popular - in total, the government has issued 65 such tranches of SGBs, collecting a staggering Rs 56,762 crore worth of investments - that doesn't mean gold investments are a great idea. In fact, we feel it is an unproductive asset class and does not always guarantee healthy returns.Take a look at the last 10-year returns. The precious metal has grown at a rather anaemic 7.56 per cent as on October 31, 2023, much lower than Sensex's 13.12 per cent," said Shubham Jain of Value Research.
But if you are still adamant about buying gold, Jain recommends opting for Sovereign Gold Bonds instead of physical gold as they are as safe and provide higher overall returns.
