Investors in Sovereign Gold Bonds (SGBs) 2020-21 Series IV, which opened for subscription between July 6 and July 10, 2020, are poised to receive substantial returns upon the commencement of the early redemption option on July 14, 2025. The Reserve Bank of India (RBI) has set the premature redemption price at ₹9,688 per unit.

Understanding the Returns

For investors who purchased the SGBs at the issue price of ₹4,852 per gram in July 2020, the redemption price of ₹9,688 translates to an impressive absolute return of ₹4,836 per unit, which is approximately 99.67%. This near doubling of the initial investment does not even factor in the additional benefit of a fixed interest rate of 2.50% per annum, paid semi-annually on the initial investment. This interest is directly credited to the investor's bank account, with the final interest payment being made along with the principal at the time of redemption or maturity.

How the Redemption Price is Calculated

The redemption price of SGBs is determined by the RBI based on a simple average of the closing price of gold of 999 purity for the three business days preceding the redemption date. This price is published by the India Bullion and Jewellers Association Ltd (IBJA). For the SGB 2020-21 Series-IV, the average closing prices from July 9, July 10, and July 11, 2025, were used to arrive at the redemption price of ₹9,688 per gram.

Sovereign Gold Bonds: An Overview

Sovereign Gold Bonds are government securities denominated in grams of gold, offering a substitute for holding physical gold. The RBI issues these bonds on behalf of the Government of India. SGBs provide a way to invest in gold without the need to physically store it, eliminating risks and costs associated with physical gold.

Benefits of Investing in SGBs

• Market-linked Returns: Investors are assured of the market value of gold at the time of maturity or premature redemption.
• Regular Interest Income: A fixed interest rate of 2.50% per annum is paid semi-annually.
• Sovereign Guarantee: SGBs are backed by the Government of India, providing a high level of security.
• No Storage Costs: As the gold is held in paper or demat form, there are no storage costs or risks associated with physical gold.
• Tax Benefits: The capital gains tax arising on redemption of SGBs to an individual is exempt.
• Liquidity: SGBs can be used as collateral for loans. Premature redemption is allowed after five years from the date of issue on coupon payment dates.
• Convenience: SGBs can be held in demat form, making them easy to manage and transfer.

Premature Redemption Process

Investors who wish to redeem their SGBs prematurely can do so after completing five years from the date of issuance, specifically on interest payment dates. To initiate the premature redemption, investors need to submit a written request to the issuing bank, Stock Holding Corporation of India (SHCIL) offices, post office, or agent at least one day before the coupon payment date. The redemption amount will then be credited to the investor's registered bank account.

Tax Implications

While the interest earned on SGBs is taxable under the Income Tax Act of 1961, the capital gains tax arising from the redemption of SGBs for an individual is exempt. However, if the bonds are sold on the exchanges before maturity, this exemption is not applicable.

The Sovereign Gold Bond 2020-21 Series-IV has proven to be a successful investment for those who opted to invest in this scheme. With near 100% returns on their initial investment, coupled with the additional interest income, investors are set to gain significantly from the early redemption option that opens on July 14, 2025.