SGB Scheme Unveiled
The Indian government introduced the Sovereign Gold Bond (SGB) scheme in November 2015. This was conceived as an alternative to physical gold ownership.
These bonds, backed by the Reserve Bank of India (RBI) on behalf of the central government, were denominated in grams of gold. Investors were thus given the advantage of a fixed annual interest, calculated at 2.5% of the issue price, and the potential for capital appreciation, mirroring the fluctuations in gold prices. The scheme was designed to reduce India's dependency on imported gold, curb the practice of hoarding, and redirect household savings towards financial assets. The goal was to provide a safer and more efficient means for Indians to invest in gold.
Early Redemption Details
A significant event involved the premature redemption of Sovereign Gold Bonds (SGBs) under the 2018-19 Series-V, initially issued on January 22, 2019. The redemption was permitted on January 22, 2026. According to the rules of the SGB scheme, the bonds were scheduled to be repaid after eight years from their issuance date. However, the scheme also allowed for early redemption, starting from the fifth year post-issuance, aligned with the interest payment dates. The redemption price for this particular series was set at Rs 14,853 per unit. This figure reflects a substantial gain of 362.13% over the original issue price of Rs 3,214, showcasing the investment's profitability. This return does not account for the additional 2.5% annual interest income received during the holding period.
Taxation Aspects
The SGB scheme had specific tax implications. The interest earned on the bonds was subject to taxation, following the guidelines set by the Income-tax Act, 1961. However, individuals were exempt from capital gains tax upon the redemption of these bonds. Furthermore, investors were entitled to indexation benefits for long-term capital gains resulting from the transfer of the bonds. This feature made SGBs a tax-efficient investment option for many. Interest payments, at a fixed annual rate of 2.5%, were disbursed semi-annually directly into the investors' bank accounts, offering a steady income stream in addition to capital appreciation linked to gold price movements.
Why Issuances Ended
In October 2023, fresh issuances of SGBs were discontinued by the government. The decision was attributed to the scheme's overall success in achieving its objectives and to the increasing costs associated with managing and servicing the bonds. Another contributing factor was the growing availability of alternative gold investment avenues, such as Gold ETFs and digital gold platforms, which reduced the need for regular SGB issuances. Despite the halt in new issuances, the existing SGBs remain valid. Investors can continue to hold their bonds until maturity or opt for early redemption, subject to the conditions of the scheme.
