Sovereign Gold Bonds (SGB) – Withdrawal options
Sovereign Gold Bond( SGB) is an attractive investment option provided by the Government of India. A total of 37 series of Sovereign Gold Bonds have been issued since November 2015. SGB, with the fixed interest pay of 2.50% pa on the holding, turns out to be an attractive investment option compared to other popular gold investment options like physical gold, gold ETF and e-gold. Each tranche of SGB is launched for a tenure of eight years with a buyback window on completion of five, six and seven years.
To Know more about SGB scheme click, Sovereign Gold Bond Scheme (SGB Scheme)
Gold as an asset class has been in spotlight for quite some time due to reasons like China-US trade war, global economic uncertainties and Covid -19 pandemic. During periods of economic uncertainties and currency volatility, gold comes to forefront with its safe haven status. Stock markets across the world have been tumbling since November 2019 due to uncertainties arising out of Covid 19 pandemic. However, gold has registered an impressive 17% gain in rupee terms during the year to date. It is interesting to note that the first ever tranche of SGB series, issued in November 2015 has appreciated by 84% and that issued in June 2019 has returned 48% gain by April 2020 end. Having registered reasonable gains, it is appropriate examining liquidation of at least a portion of investments and the implications thereof.
The two withdrawal options available to exit or liquidate investments in Sovereign Gold Bonds are sale in secondary market and buyback window of RBI.
SGB(Sovereign Gold Bonds) withdrawal option – Secondary market route
Various aspects of secondary market route for redemption of SGB bonds are mentioned below:
• A trading account and a demat account are compulsory for buying or selling SGB in secondary market.
• All SGB tranches are listed and traded in the cash market of BSE and NSE. However, transaction volume taking place are very less in majority of SGB tranches. Only around 12 of the 37 tranches are traded with an average volume of more than 100 units per trading day.
• Transacted prices were 5-10% percent lower per unit compared to spot price till a few weeks back, though the discount has come down to 1-2 percent recently. Hence, realisation of spot price may not be possible. Apart from this discount, both sellers and buyers will have to incur brokerage in the range of 10 to 50 paise per Rs. 100.
• If the seller has more units to sell, staggering over a period may help to realise better price.
• If both buyer and seller belong to same depository (CDSL or NSDL) transaction and delivery may take place smoothly. Else delay can be expected. Ensure this aspect in consultation with your broker.
SGB(Sovereign Gold Bonds) withdrawal option – Buyback window of RBI
SGBs are issued for eight year tenure and lock in period of five years. RBI provides a buy back facility on completion of five, six and seven years at least 30 days prior to the coupon payment date. The first buyback date in most of the earlier issued bond tranches is just few months from now. For the tranche issued in November 2015, the buy back window will be opened by second half of October 2020. Investors holding SGBs launched in 2015-16 may wait for the buyback window to open. The buyback price is the simple average of closing price of gold of 999 purity for the previous week, published by the Indian Bullion and Jewellers Association (IBJA).
SGB(Sovereign Gold Bonds) redemption before completion of tenure-Tax implication
Capital gains arising on SGBs held till maturity (eight years) are tax-exempt. However, the gains arising from sales in secondary market or through the buyback window are taxable at the slab applicable to the investor if the holding period is less than 36 months and at 20 per cent with indexation benefit for holding period longer than 36 months.
