The Reserve Bank of India has priced the early redemption of the Sovereign Gold Bond (SGB) 2016-17 (Series IV) program at Rs 5,077 per unit. Starting today, September 17, the second SGB prepayment due date will be due, according to a press release from RBI.
The redemption price of SGB is based on the simple average of the closing price of 999 purity gold of the week (Monday to Friday) preceding the date of redemption as published by the India Bullion and Jewelers Association Ltd ( IBJA), the RBI said. “Accordingly, the redemption price for early redemption due on September 17, 2022 will be Rs 5077/- (Rs five thousand seventy seven only) per unit of SGB based on the simple average of the closing price of gold for the week of September 05 to September 09, 2022,” he further added in the press release.
Those who have invested in the program are expected to earn an annualized return of approximately 11% or 75% absolute return per gram of gold. At the time of issuance, the Sovereign Gold Bond Scheme 2016-17, Series IV was priced at Rs 2,893 per gram of gold. The face value of this SGB was Rs 2,943 per gram.
Therefore, investors who opted for early withdrawals will get an absolute return of 75.49%: redemption price of Rs 5,077 minus issue price of Rs 2,893, divided by 100.
However, investors should note that they must pay taxes on their capital gains.
How are gold sovereign bonds taxed?
Interest earned on SGB bonds is taxed as regular interest income at rates applicable to the individual’s slab rate. “If one falls within the higher slab rate, such interest would be taxed at 30% plus applicable surcharge and tax. For charitable trusts and NGOs whose income is exempt, interest income would be exempt,” said Ankit Jain, Partner at Ved Jain & Associates.
“Upon redemption, capital gains on these gold bonds receive preferential treatment. For individuals, all capital gains on these gold bonds are exempt. No tax has to be paid on the earnings of these gold bonds. For non-retail taxpayers, while the gains are taxable in their hand, unlike ordinary bonds, gold bonds are eligible for indexation when held for a period of more than three years. The tax rate in such a case would be 20%,” he added.
Proceeds from redeeming the bonds after the eight-year term are tax-exempt, CNK partner Pallav Pradyumn Narang told News18.com.
“If the bonds are redeemed after the lock-up period (five years) but before maturity (eight years), the difference between the redemption value and the purchase price is taxed as a long-term capital gain at 20% rate with indexing benefits,” added Pradyumn.
Should you invest in gold sovereign bonds?
Investing in SGBs offers the following three benefits, according to Nihal Bhardwaj, Partner, SKV Law Offices.
(a) During the holding period, interest @2.50 per year pa (fixed rate) on the initial investment amount is earned.
(b) There is no capital gains tax payable on redemption of SGB after maturity.
(c) There are no storage worries like those of physical gold
“GBS are a better alternative to physical gold because they eliminate the risks and costs associated with physical gold. It makes sense to allocate a small portion (10-12%) of the portfolio to gold and ‘invest in SGB,’ Bhardwaj said.
“Gold sovereign bonds are an excellent investment opportunity offering multiple benefits, especially to individuals. In a country where gold is a necessity for all households, especially at auspicious times such as weddings, investing in such gold bonds helps protect against the price of gold while taking advantage of interest and tax benefits. And since these bonds can be held in demat format, there is no need to worry about the safety and security aspects associated with physical gold. It is an indispensable investment tool in every household,” added Jain.
Investment in gold sovereign bonds has been encouraged lately. “The hassle of maintaining gold is what is saved by investing in SGBs. Also, SGBs are normally issued by the government at a discount to the average market price, which further adds another benefit to investing,” said Sameer Jain, Managing Partner at PSL Advocates & Solicitors.
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