Summary of this article
RBI sets early redemption price at Rs 14,167.
Online investors achieve over 200 percent absolute returns.
Early SGB redemption attracts capital gains tax rules.
The Reserve Bank of India (RBI) has announced the premature redemption price for the Sovereign Gold Bond (SGB) 2021-22 Series VII tranche. The premature redemption date for the tranche is November 2, 2026, and the price at which the early redemption can be done has been fixed at Rs 14,167 per unit.
SGB 2021-22 Series VII Redemption Price Calculation
According to an RBI release, the redemption price of SGB 2021-22 Series VII has been fixed based on the simple average of the closing price of 999 purity gold over the previous three business days. According to the India Bullion and Jewellers Association (IBJA) the RBI factored in the closing prices from October 28, October 29, and October 30, 2026, which were Rs 1,42,300, Rs 1,42,144, and Rs 1,40,891 per 10 grams.
200% Gains for Early Investors
The SGB 2021-22 Series VII was originally issued on November 2, 2021. At the time of the initial offering, offline investors paid an issue price of Rs 4,765 per gram. Those who applied online and made digital payments enjoyed a discount of Rs 50, reducing their effective issue price to Rs 4,715 per gram.
Based on the premature redemption price of Rs 14,167, online investors are looking at an absolute profit of Rs 9,452 per gram. This translates into a return of 200.47 per cent over five years, entirely excluding the additional interest they earned during the holding period. For offline investors the absolute profit would be around Rs 9,402 per gram and they would have made gains of 197.31 per cent.
Tax Implications for SGBs
Capital gains tax on the redemption of SGBs is fully exempt for individuals if their bonds are held until the end of their full eight-year maturity period. Since this is a premature redemption after five years, capital gains tax rules will apply based on current regulations. Additionally, the fixed interest earned on the bonds is added to the investor's taxable income and taxed according to their respective income slab.
The Growing Importance of Paper Gold
Physical gold purchases have historically dominated the market, but paper gold instruments like SGBs offer significant advantages that make them an efficient investment vehicle. Investing in paper gold eliminates the pitfalls associated with physical purchases, such as making charges, purity concerns, and expensive storage or locker fees.
Additionally, SGBs are the only gold investment that pays a fixed interest rate on the initial capital, allowing investors to earn a regular income alongside capital appreciation. Since they are issued by the RBI on behalf of the Government of India, they carry a sovereign guarantee on both the principal amount and the interest payouts.
For investors looking to participate in future tranches, paper gold can easily be purchased during primary issues. While no new fresh tranches of SGBs have been issued investors can purchase them from the secondary market through standard demat accounts. Additionally, investors can consider investing in other paper-gold assets such as Electronic Gold Receipts, Gold Exchange Traded Funds (ETFs) and Gold Mutual Funds.
