Redemption rate of 1st Sovereign Gold Bond Tranche set 80% higher vs issue price

MUMBAI: The Reserve Bank of India (RBI) has set the redemption price of the first tranche of sovereign gold bonds (SGBs) at Rs4,837 per unit. As per a press release issued by the central bank, the price is based on simple average closing price of gold of .999 purity through Monday to Friday preceding the date of redemption.

The first tranche was issued during 5-20 November, 2015, at an issue price of Rs2,684. This leaves investors with 80% gains (CAGR of 12.5%). By way of comparison, the Nifty CAGR over this period works out to about 13.5%. If we include dividends, the Nifty return works out to be higher. The Nippon India ETF Nifty BeES, an ETF tracking the Nifty has delivered a return of 14.85% over the past five years.

SGBs mature eight years after their issue date, however the RBI allows premature redemption after the fifth year. This premature redemption window opens every six months on each coupon payment date. Premature redemption of the 1st tranche of SGBs became possible in November 2020 and the next payment date is today — 29 May.

Investors have to submit a redemption request to the bank/post office or agent they purchased the bonds from at least one day before the payment date. Gains on SGBs are tax free on maturity.

However, there is a lack of clarity on taxation on premature redemption. According to some experts, in case of premature redemption, the gains will be taxed as long-term capital gains and hence investors will have to pay a tax of 20% after adjusting the purchase price for indexation.

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