Sovereign gold bonds were introduced in the year 2015 to channelize households spend on physical gold to financial investment in gold (i.e. risk free in respect of theft and other hassles such as storage cost) bearing an incentive of interest rate.
And these bonds issued by the RBI on behalf of the government of India have a maturity time frame of 8 years and redemption will also be in cash against the initial investment. Further upon maturity, investor will get the last interest payment installment together with the principal amount. When talking about the redemption price, upon maturity against SGBs individual will get price basis the simple average of closing price of last three business days of gold of 999 purity from the repayment date as published by the India Bullion and Jewelers Association Limited
What is the process involved in redemption at maturity of SGBs?
SGB investor will be given one month notice in advance on the ensuing maturity of the bond.
And on the maturity date, proceeds shall be credited into the bank account of the investor from which the investment was initially made or on record with the institution.
Further, in a case, there is change in any of the personal details such as e-mail, bank account etc. it should be promptly provided to the bank/Stock Holding Corporation of India Limited or Post Office.
Pre-mature withdrawal or redemption of SGBs
Now after the first two tranches were made available for early redemption, the 'SGB 2.75% MAR 2024 TR-III' (NSE symbol: SGBMAR24) is also due for early redemption on March 29, 2021.
Invested In SGB 2.75% March 2024 Tranche III- Available for premature redemption: What should you do given steep price correction of gold from record highs?
So, how should you deal with your investment in case in you invested in this third tranche of SGB: Here are detailed different aspects on the same:
Now simply, SGBs are bonds with a maturity term of eight years and a lock-in of 5 years. Though they can be traded in the secondary market after the end of the five year lock-in, the volume of trade in them is very low. So, to give a relaxation here or enable investors willing to redeem their investments prematurely, the RBI opens up the buyback window.
|SGB Tranche||Buyback date|
|First SGB tranche (issued in November 2015)||November 20, 2020|
|Second SGB tranche||February 8, 2021|
|Third SGB Tranche issued on March 29, 2016||March 29, 2021|
How to redeem SGB units?
For the redemption before maturity and after the lock-in period of 5 years is over, you need to inform the financial entity bank/PO/SGHCIL 10 days before the interest payment date and make a request for the same. And so now if you wish to redeem this particular third tranche that shall be available for early redemption on March 29, the request should be made by March 18, 2021.
And redemption price shall be decided as discussed above i.e. based on the average of closing price of gold of 999 purity of the last 3 business days from the repayment date as issued by the IBJA.
So, now as the SGB Tranche 3 issued in March 2016 is up for early redemption, first we should know the basis inputs of it.SGB Issue SGB 2.75% March 2024 Tranche III
|SGB Issue||SGB 2.75% March 2024 Tranche III|
|Issuance date||March 29, 2016|
|Issue price||Rs. 2916 per gm|
|Interest paid||Rs. 361|
|First buyback date||March 29, 2021|
|Maturity date||March 29, 2024|
|Closing price as on March 10, 2021||Rs. 4613.12|
Source: RBI, moneycontrol.com for the last traded rates
The investment made into SGB has yielded return of 2.75% at an annualized rate of return or IRR of 12 percent and this includes interest or coupon payments.
Tax implication in case of pre-mature withdrawal or redemption of SGBs
For the pre-mature redemption, an investor in SGB can take either of the routes i.e. via secondary market or through the RBI exit window. And in case of such early redemption, there shall be applied capital gains tax at the rate of 20 percent.
However in a case if SGBs are sold before a period of 36 months then short term capital gains tax at the investors' slab rate applies. But as these SGBs are open for redemption (early) for the first time this fiscal year, the taxation aspect is being varyingly interpreted.
Should you take the RBI's exit window to redeem pre-maturely from SGBs?
The price of gold has corrected by almost 20 percent from record highs and there is ample scope for the gold prices to again scale to those highs as global stimulus measures to refuel the economies world over and will stoke inflation. And gold serves as a perfect hedge against inflation, so investors given the current price correction may enter the precious metal and offload position only to book profits if the underling percentage of gold in one's portfolio is over 10%.