Understanding the SGB in Question
The headline refers to the Sovereign Gold Bond (SGB) 2017-18, Series VI. This specific tranche was issued in November 2017. At the time, the issue price was set at ₹2,945 per gram of gold. For those who applied online and paid digitally, the government
offered a discount of ₹50 per gram, bringing their cost down to ₹2,895 per gram. SGBs are government securities denominated in grams of gold, making them a popular alternative to holding physical gold. They come with an eight-year maturity period but offer an option for early redemption after the fifth year on interest payment dates.
Decoding the Redemption Price
The redemption price for any SGB is not arbitrary. The Reserve Bank of India (RBI) calculates it based on the simple average of the closing price of 999 purity gold for the three business days preceding the date of redemption. This price is published by the India Bullion and Jewellers Association (IBJA). While the headline mentions ₹15,384, this isn't the price per gram but likely the total redemption value for a specific holding. For our calculation, let's assume a hypothetical redemption price of ₹6,154 per gram to illustrate the process, a figure reflecting significant gold price appreciation since 2017. An investor holding 2.5 grams would receive ₹15,385 (2.5 x 6,154), aligning with the headline's figure.
Calculating Your Capital Gains
The primary return from an SGB comes from the capital appreciation of gold. To calculate the absolute gain, you simply subtract the issue price from the redemption price. For an investor who bought online at ₹2,895 per gram and redeems at our hypothetical ₹6,154 per gram, the gain is substantial. The capital gain per gram is ₹3,259 (₹6,154 - ₹2,895). This translates to an absolute return of approximately 112.5% on the initial investment, without even factoring in the interest payments. This demonstrates the power of SGBs in capturing the upside of gold prices.
Don't Forget the Interest Income
Beyond capital gains, SGBs offer a unique advantage over physical gold and Gold ETFs: a fixed interest rate. The scheme provides a fixed interest of 2.5% per annum on the initial investment amount. This interest is paid semi-annually directly into the investor's bank account. For an investor holding one gram purchased at ₹2,895, this amounts to ₹72.37 per year. Over a holding period of nearly nine years (from late 2017 to mid-2026), this regular interest income adds up, further boosting the overall investment returns. This dual benefit of interest and appreciation is a key feature of SGBs.
The Unbeatable Tax Benefit
Perhaps the most attractive feature of SGBs is the tax treatment upon redemption. The capital gains an individual earns when redeeming SGBs upon maturity (after 8 years) are completely tax-exempt. This gives SGBs a significant edge over other gold investments like physical gold, digital gold, or Gold ETFs, where capital gains are taxable. However, it's crucial to remember that the semi-annual interest income is not tax-free. This interest is added to your annual income and taxed according to your applicable income tax slab.
