SGB 2020-21 Series I: Investors Set To Make Over 205% Gains Upon Premature Redemption As Festive Demand Lifts Gold Prices

Gold prices have been on a continuous uptrend recently. Investors who hold gold in their portfolio are likely to have gained from the uptick in prices. Sovereign Gold Bond (SGB) investors who purchased the SGB 2020-21 Series I tranche are set to get a chance to redeem their holdings prematurely.

SGBs are securities issued through the Reserve Bank of India (RBI) on behalf of the government, which are denominated in grams of gold, with the minimum investment quantity fixed at 1 gram.

The bonds come with a sovereign guarantee on both the principal amount and the interest payout. The scheme has a maturity of eight years. However, premature redemption is allowed after the fifth year from the date of issue, on a date announced by the RBI.

SGB 2020-21 Series I  Redemption Price

According to a release by the RBI, the premature redemption price for SGB 2020-21 Series I is Rs 14,159 per gram. The central bank determined the price based on the simple average of the closing price of 999 purity gold for the three business days preceding the redemption date, as published by the India Bullion and Jewellers Association. Specifically, the calculation factored in the closing prices for October 23, October 26, and October 27, 2026.  

SGB 2020-21 Series I Investors Set To Gain

The issue date for SGB 2020-21 Series I was April 28, 2020. The bonds were originally issued at Rs 4,639 per gram for offline investors. For investors who applied online and paid digitally, the government offered a discount of Rs 50, bringing their issue price down to Rs 4,589 per gram.

Based on the premature redemption price of Rs 14,159, regular investors are set to make an absolute return of Rs 9,520 per gram, which translates to a percentage return of approximately 205.22 per cent. Meanwhile, investors who benefited from the online discount will secure an absolute profit of Rs 9,570 per gram, equating to a percentage return of around 208.54 per cent.

The initial investment has seen significant appreciation due to the rise in gold prices over the years. Investors eligible for premature redemption would have also earned a yearly interest. The final amount will be credited to the investor's bank account linked to their demat account automatically.

Taxation on SGBs

The redemption of SGBs is tax exempt for investors who hold them for the entirety of the eight year maturity period, provided they were allotted the bonds in the primary issue. However if the SGBs were bought from the secondary market, they are not tax exempt upon maturity.

Furthermore, the interest earned on the SGBs is not tax exempt, thus investors would have paid yearly tax on the interest earned based on their income tax slab rate. Since this is a premature redemption, tax rules for early withdrawal may apply based on current regulations.

Festive Demand For Gold

Looking ahead, seasonal demand for gold is on the uptrend as the market has entered the festive and wedding period. According to a report by the World Gold Council (WGC), manufacturers have reported healthy order flows and retailers are actively replenishing inventories to meet consumer needs. The WGC highlights that demand is heavily benefiting from wedding related buying, festive purchases, and a growing consumer preference for lightweight jewellery along with a rise in demand for paper gold instruments like SGBs.