Sovereign gold bonds due for premature redemption deliver up to 20 pc growth
The Reserve Bank of India (RBI) has announced the premature redemption price for two tranches of Sovereign Gold Bonds (SGBs) due on August 11, 2025.
The 2019-20 Series IX (issued in February 2020) and the 2020-21 Series V (issued in August 2020) can be prematurely redeemed at Rs 10,070 per gram. SGBs have an eight-year maturity, but investors can opt for premature redemption from the fifth year onwards.
Investors in the February 2020 SGB tranche achieved a compounded annual growth rate (CAGR) of 20 per cent. The August 2020 tranche delivered a 13.5 percent CAGR to investors over five years.
These returns are in addition to 2.5 per cent annual interest paid semi-annually, which increases the effective yield.
The returns from these tranches mirror gold’s returns over the last five years. In February 2020, when RBI released the 2019-20 Series IX tranche, the gold was priced at Rs 4,070 per gram, just before the pandemic spurred a flight to safe-haven assets.
When the Reserve Bank of India (RBI) issued the second tranche (2020-21 Series V) in August 2020, global uncertainty and interest rate cuts caused prices to rise to Rs 5,334 per gramme.
Since then, inflation fears, geopolitical tensions, and sustained central bank buying have kept gold prices elevated. Experts predict a further increase in gold prices due to the geopolitical tensions and threats to the US dollar's reserve status.
SGBs are government-backed securities denominated in grams of gold. It is a digital alternative to holding physical gold and earning returns based on price appreciation and semi-annual returns. The redemption price is calculated based on the simple average of closing prices for 999-purity gold over the three business days preceding redemption, as published by the India Bullion and Jewellers Association (IBJA).
Individual investors can avoid capital gains taxes by holding SGBs until maturity or until the premature redemption date.
