Early Redemption Explained
The RBI's decision to redeem the SGBs from the 2019-20 Series-II ahead of schedule generated excitement among investors. Issued on July 16, 2019, these
bonds were available for premature redemption on January 16, 2026, which occurred after five years from the issuance date, as per the rules. The redemption price was fixed at Rs 14,092 per unit. This figure reflects an impressive 315% gain compared to the discounted issue price of Rs 3,393. The redemption price was determined using the average of closing gold prices published by the India Bullion and Jewellers Association (IBJA) over the three business days preceding January 16, 2026, ensuring fairness in the valuation process. Investors also benefited from the 2.5% annual interest on their investment, paid semi-annually.
SGB Scheme: A Primer
The Sovereign Gold Bond (SGB) Scheme was initially introduced by the Indian government in November 2015 as a means to encourage investment in gold while reducing the country's reliance on physical gold imports. The RBI issued these bonds on behalf of the government, denominated in grams of gold. The scheme offered investors the dual advantage of earning a fixed annual interest rate (2.5% on the issue price) and the potential for capital appreciation linked to gold prices. In its initial offering, investors who made payments online received a discount of Rs 50. The SGBs were designed to mature after eight years, but they also included a premature redemption option after the fifth year, on the interest payment date.
Returns and Tax Benefits
Investors in the 2019-20 Series-II SGBs received an exceptional return of 315% on their initial investment. This did not include the 2.5% annual interest income earned throughout the holding period. The interest earned on SGBs is subject to income tax as per the Income-tax Act, 1961. However, individuals were exempt from capital gains tax upon redemption of the bonds. Additionally, long-term capital gains resulting from the transfer of these bonds also benefited from indexation, further enhancing the investment's attractiveness. This feature helped to offset the impact of inflation on the returns, making SGBs a compelling investment option for many.
Why the Scheme Ended
The government decided to discontinue fresh issuances of SGBs in October 2023, after it was determined that the scheme had largely achieved its original goals. The rising costs associated with managing and servicing the bonds were a significant factor in this decision. Furthermore, the availability of other gold investment options, such as Gold ETFs and digital gold, had increased, thus reducing the need for periodic SGB issuances. Despite the discontinuation of new bonds, existing bonds remain valid. Investors still have the option to hold them until maturity or opt for premature redemption, adhering to the scheme’s regulations.
