Deconstructing the Phenomenal Return
Investors who bought the SGB 2020-21 Series VI when it was issued in September 2020 are looking at a capital appreciation of around 204%. The bond was originally issued at a nominal price of ₹5,117 per gram. However, those who applied online and paid
digitally received a ₹50 discount, bringing their cost down to ₹5,067 per gram. With the premature redemption price now fixed at ₹15,384, an investor who bought online has a capital gain of ₹10,317 per gram. This translates to an investment of ₹1 lakh growing to approximately ₹3.04 lakh in just six years, not including the semi-annual interest payments.
How Is the Redemption Price Calculated?
The redemption price is not an arbitrary figure but is linked directly to the market price of gold. The RBI calculates this value based on the simple average of the closing price for 999 purity gold for the three business days preceding the redemption date. These prices are published by the India Bullion and Jewellers Association (IBJA), ensuring transparency and alignment with the prevailing market rates. This mechanism protects the investor's interest by ensuring they receive the current market value of their gold units upon redemption.
The Crucial Factor: Taxation on Your Gains
While the returns are impressive, investors must understand the tax implications, which have recently changed. Firstly, the 2.5% annual interest paid on the initial investment is fully taxable under 'Income from Other Sources' at your applicable income tax slab rate. More importantly, a change in tax laws effective from April 1, 2026, impacts capital gains. Previously, gains from premature redemption with the RBI were tax-exempt. Now, for any premature redemption after this date, the capital gains are taxable. Since this bond has been held for more than 12 months, the profit will be classified as Long-Term Capital Gains (LTCG) and taxed at 12.5% (plus applicable cess), without the benefit of indexation.
To Redeem or to Hold? Weighing Your Options
This announcement places investors at a crossroads with two clear choices. The first is to exercise the premature redemption option. This allows you to lock in the substantial 204% gain and gain immediate liquidity, even after accounting for the 12.5% LTCG tax. The second option is to hold the bonds until they mature in September 2028 (the full 8-year tenor). The primary advantage of holding to maturity is that for an original subscriber, the capital gains are completely tax-free. However, this path carries the market risk that gold prices could decline over the next two years, potentially eroding your gains.
Making the Right Decision
The choice between redeeming now and holding on depends entirely on your personal financial situation and risk appetite. If you require funds now or wish to de-risk and secure your profits, redeeming and paying the tax may be the logical step. On the other hand, if you have a long-term view, believe gold prices will remain strong, and want to avail the significant benefit of tax-free gains, holding until maturity could be more rewarding. Investors should contact their bank or depository participant to understand the exact procedure for initiating a premature redemption request.
