Sovereign Gold Bonds (SGBs) are currently trading at a premium over their reference prices on exchanges, driven by their tax benefits and attractive coupon rates.
With speculation over new issuances in the future, these listed bonds have seen increased demand. By mid-August 2024, the top 15 most liquid SGB series were closing 8% higher than their reference prices.
According to data from ibjarates.com, the official reference rate provider for SGBs, these bonds have consistently outperformed. Since their inception in 2015, the Reserve Bank of India (RBI) has issued 67 tranches of SGBs, amounting to a total of 14.7 crore units, all of which are listed in the secondary market and available for trading on the BSE and the National Stock Exchange NSE through demat accounts.
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Among the top performers, the SGB 2023-24, Series IV (SGBFEB32IV) stands out with the highest premium at 12.0%, closing at ₹7,930. This is closely followed by the SGB 2023-24, Series II (SGBSEP31II), which recorded a premium of 9.1% and a close price of ₹7,726, and the SGB 2023-24, Series I (SGBJUN31I), with an 8.9% premium and a close price of ₹7,712.
The daily average trading volume over the last three months for these bonds reflects strong market activity, particularly for the SGB 2023-24, Series IV and SGB 2023-24, Series III (SGBDE31III), which saw volumes of ₹1.93 crore and ₹1.95 crore respectively. The premiums across these series vary, ranging from 5.0% to 12.0%, indicating that investors are valuing these bonds significantly above their reference rates provided by the Indian Bullion and Jewellers Association (IBJA).
The close prices for these bonds as of August 14, 2024, range between ₹7,431 and ₹7,930, underscoring the robust demand for SGBs.
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So what exactly are SGBs?
SGBs are government securities issued in denominations of grams of gold, providing a secure investment that combines the benefits of gold ownership without the need to physically hold the metal. Launched in November 2015 under the Gold Monetisation Scheme, SGBs are issued periodically by the RBI in consultation with the Government of India. These bonds typically have an eight-year tenor with the option to exit after the fifth year on interest payment dates. They offer a fixed interest rate, currently set at 2.5% per annum, payable semi-annually.
The bonds are denominated in multiples of grams of gold, with a minimum denomination of 1 gram and a maximum of 4 kilograms for individuals and Hindu Undivided Families (HUFs) in a financial year. For trusts and similar entities, the limit is 20 kilograms per financial year. SGBs are considered risk-free investments as they are backed by the government.
How can I buy them?
Investors have two primary options for purchasing SGBs: online through demat accounts and net banking, or offline through authorised financial institutions such as banks and designated post offices. The demat route allows investors to trade these bonds on exchanges, where prices fluctuate based on the market, offering opportunities to purchase them at rates that may differ from the reference price.
Offline investment can be done at banks and post offices, where investors can use physical application forms and payment methods like cash, cheques, or demand drafts.
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Better than physical gold?
One of the main advantages of SGBs is that they offer a secure alternative to holding physical gold, eliminating the risks and costs associated with storage. Investors are guaranteed the market value of gold at the time of maturity, along with periodic interest payments.
Additionally, SGBs eliminate concerns such as making charges and purity issues often associated with gold in jewellery form. The bonds are held either in the RBI’s books or in demat form, reducing the risk of loss.
Any risks?
However, there are potential risks involved, particularly the possibility of capital loss if the market price of gold declines. Despite this, investors do not suffer losses in terms of the units of gold they have paid for, as the quantity remains constant. It’s important to note that SGBs are exclusively available for sale to resident Indian entities, including individuals (either individually, on behalf of a minor child, or jointly with another individual), HUFs, trusts, universities, and charitable institutions. Investors who later change their residential status from resident to non-resident can continue to hold their SGBs until early redemption or maturity.
The tax implications of SGBs are also favorable. While the interest earned on the bonds is taxable under the Income-tax Act, 1961, the capital gains tax arising from the redemption of SGBs by an individual is exempted. Additionally, indexation benefits are provided for long-term capital gains arising from the transfer of bonds.
