SGB 2020-21 Series III Premature Redemption Price Announced; Investors To Get Over 219% Return

The Reserve Bank of India (RBI) has announced the premature redemption price for the 2020-21 Series III tranche of the Sovereign Gold Bond scheme. The premature redemption date comes at a time when gold prices have surged to near-record highs above $4,300 per troy ounce this week following the US-Iran peace deal announcement.

The agreement over a peace deal framework led to a drop in crude oil prices and global inflation expectations, driving markets to anticipate central bank interest rate cuts that make non-yielding assets like gold highly attractive to investors.

SGB 2020-21 Series-III Premature Redemption Date

Investors who hold units of SGB 2020-21 Series-III can redeem their holdings on June 16. RBI regulations allow early redemption of SGBs five years from the date of the issue on specific dates when semi-annual interest is payable, which allows investors who hold the SGB 2020-21 Series-III to redeem their holdings before the eight-year completion period.

How Much Will SGB 2020-21 Series III Investors Gain?

Investors can prematurely redeem their SGB 2020-21 Series III holdings at a price of Rs 14,774 per unit. The subscription amount for online investors when the tranche launched in June 2020 was fixed at Rs 4,627 per gram, which included a digital discount of Rs 50. On the other hand, the issue price was fixed at Rs 4,677 for investors who purchased their SGBs offline.

"Accordingly, the redemption price for premature redemption due on June 16, 2026, shall be Rs 14,774/- (Rupees Fourteen Thousand Seven Hundred and Seventy Four Only) per unit of SGB based on the simple average of the closing price of gold for the three business days, i.e., June 11, June 12, and June 15, 2026," RBI said in a release.

Given the redemption price set by RBI, investors who purchased the SGB units online are set to get an absolute return of approximately 219 per cent on June 16 if they prematurely redeem their holdings. Online investors are set to get absolute capital gains of Rs 10,147 per unit, while offline buyers will see gains of Rs 10,097 per unit.

How Is The Premature Redemption Price Calculated?

The premature redemption price for SGBs is determined using the simple average of the closing prices of 999 purity gold from the India Bullion and Jewellers Association (IBJA) website. The closing price of gold from three working days before the premature redemption date is used for determining the simple average.

For the SGB 2020-21 Series III, the premature redemption price was calculated on the basis of the simple average of the closing prices on June 11, June 12, and June 15, 2026. The closing prices per gram for June 11, June 12 and June 15 were Rs 14,478, Rs 14,780 and Rs 15,064, respectively.

SGB investors who purchased the bond would have also received an annual interest at the fixed rate of 2.50 per cent in addition to the amount they get upon redemption. However, this interest is credited semi-annually directly to the bank account of investors and remains taxable as per the income tax slab of the investor.

Avenues For Investing In Paper Gold

Amid the rise in gold prices, investors have increasingly shown more and more interest in acquiring viable alternatives to physical gold. These alternatives can potentially circumvent challenges related to safety, storage costs, and purity.

While Sovereign Gold Bonds serve as a suitable alternative, no new tranches have been announced since the 2023-24 Series IV tranche was issued on February 21, 2024. Amid no new issuances in sight, investors can still buy the bonds from the secondary market, where existing tranches actively trade on stock exchanges.

However, in addition to secondary market bonds, investors have alternatives such as Electronic Gold Receipts (EGRs). According to a report by CNBC TV18, NSE’s Chief Business Development Officer, Sriram Krishnan, highlighted that EGRs are set to transform the gold market in India by fostering transparent price discovery.

Amid the ongoing investor interest in paper gold, some investors have gravitated towards digital gold sold online through various unmonitored platforms. However, Sebi has strongly cautioned against doing so due to the lack of structural regulations, advising investors to instead put their money into regulated options like EGRs and Gold ETFs.