The next tranche of Sovereign Gold Bond (SGB) scheme is set for redemption on August 5, 2024. These bonds, launched on August 5, 2016, have an eight-year holding period. Purchased at ₹3,119 per gram, they offer substantial returns to investors. Out of the 2.6 tons initially bought, 225.322 kg were redeemed after five years, leaving 2.75 tons still due for redemption.
In September 2024, an additional 2.39 tons will be up for redemption, totalling nearly five tons of bonds coming due over the course of two months. The tranche dated September 30, 2016, was bought at ₹3,150 per gram.
As of today, investors have earned an annual interest rate of 2.5% over the past 8 years, and the price of gold has appreciated by 115%, reaching nearly ₹6,800 per gram.
Global market corrections and a 9% reduction in import duty have led to a decrease in Indian gold prices, bringing them down from an all-time high of ₹7,500 per gram and from the Budget Day high of ₹7,250 per gram. Despite this decline, investors in the 2016 SGB still enjoyed triple-digit gains.
Top government officials state, “For SGB issued in 2015, the returns to investors are approximately 12% per annum, net of income tax. Such returns are better than the returns from most other asset classes with similar risk profiles.”
A total of 64 issuances, amounting to approximately 141 MT, have been completed between August 2016 and February 2024. The most recent tranche was announced in February 2024 and is scheduled for redemption in eight years, in 2032.
“So far, 67 issuances of SGB have been done between November 2015 and February 2024. The SGB subscribed in these issuances are for about 147 MT of gold, out of which about 6 MT of the first three issuances between November 2015 to March 2016 matured, and the proceeds have been paid back,” officials said.
With India importing approximately 800 tons per annum and the import duty slashed from 15% to 6%, the government stands to lose ₹12,000 crore annually due to this reduction. However, the government does gain slightly from the upcoming 5-ton redemptions. A back-of-the-envelope calculation indicates that the government saves ₹59 crore per ton, resulting in a total saving of ₹303 crore (5.14 × ₹59 crore).
“Therefore, it is fallacious to infer that the government has reduced the customs duty in order to save on the redemption value of the SGBs. Even considering the social media comment about the government saving a total of ₹9,000 crore spread over the next eight years, the government stands to lose ₹12,000 crore every year,” officials said.
They added, “Further, the comment is premised on a wrong assumption that the entire outstanding stock of gold is due for redemption now itself. The fact is that the outstanding stock will be due for redemption over a period of the next eight years.”
When the SGB scheme was introduced in 2015, the customs duty was set at 10%. It was subsequently increased to 15% in 2019, 2021, and finally in 2022. These duty hikes resulted in higher profits for investors and, consequently, increased government liabilities for redemptions. The distorted duty structure, combined with record-high gold prices, led to a rise in the influx of unofficial gold into the country, prompting the government to reduce import duties.
“With these increases resulting in a total increase of 5% (from 10% to 15%), the price of gold went up, the investors gained, and the government’s potential liability at the time of redemption went up, i.e. investors gained at the cost of the government,” explained the officials cited above.
What is SGB?
SGB are government securities denominated in grams of gold. They are substitutes for holding physical gold. The SGB offers a superior alternative to holding gold in physical form. And they have a long list of positives. Investors are assured of the market value of gold at the time of maturity and periodical interest. SGB is free from issues like making charges and purity in the case of gold in jewellery form. The bonds are held in the books of the RBI or in demat form, eliminating the risk of loss of scrip etc.
On maturity, the Gold Bonds shall be redeemed in Indian rupees, and the redemption price shall be based on a simple average of the closing price of gold of 999 purity of previous three business days from the date of repayment, published by the India Bullion and Jewelers Association Ltd.
These securities are eligible to be used as collateral for loans from banks, financial institutions, and non-banking financial companies (NBFCs). Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax arising on redemption of SGB to an individual has been exempted. The bonds are tradable from a date to be notified by RBI. The bonds can also be sold and transferred as per the provisions of the Government Securities Act, 2006. Partial transfer of bonds is also possible.
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