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The Power Of Sovereign Gold Bonds

Introduction to Sovereign Gold Bond Series 1, 2015

The Sovereign Gold Bond (SGB) Scheme 2015 Series 1 has been a noteworthy investment avenue, offering a unique blend of security and returns for investors keen on gold exposure. Issued on November 30, 2015, at an issue price of Rs 2,684 per gram of gold, this series brings distinctive features to the table.

Standout Features 

One of the standout features is the fixed semi-annual interest rate of 2.75% per annum on the initial investment amount. The interest accrues from the date of issue, payable in half-yearly rests. Come maturity, the last interest instalment joins hands with the principal amount. Investors, therefore, enjoy a steady income stream alongside potential capital appreciation.

Redemption Process and Price Determination 

The redemption aspect adds another layer of appeal. The SGB is set to mature after eight years from its issue date on November 26, 2015. However, a unique provision allows for premature redemption after the fifth year from the issue date, coinciding with the interest payout. The redemption price is determined based on the simple average of the closing price of 999-purity gold in the week preceding the redemption date, as reported by the India Bullion and Jewellers Association Limited.

Financial Flexibility & Tax Implications 

Moreover, SGBs offer a financial flex point, allowing investors to use them as collateral for loans, enhancing liquidity and flexibility in financial planning. While the interest on these bonds falls under taxable brackets per the Income-tax Act, of 1961, the capital gains tax mirrors that of physical gold.

Historical Returns

For investors eyeing early exits, the redemption prices in recent tranches tell an intriguing story.

  1. In 2021, the redemption price surged to Rs 4,837 per unit against the initial issue price of Rs 2,684, marking a robust return of about 81% in just five years. This translates to an impressive annual average return of 12.5% CAGR.
  2. Looking ahead, the early redemption price for the tranche maturing on May 30, 2023, is projected at Rs 6,047/- per unit, showcasing a remarkable return of 125% over eight years or an annual CAGR of 10.69%. Investors have the flexibility to redeem SGBs before maturity, and post completion of the fifth year, the capital gains, if any, are taxed at 20% post-indexation.

Comparison with Fixed Deposits 

Investors often weigh the pros and cons of different investment avenues, and one notable comparison is between Sovereign Gold Bonds (SGBs) and Fixed Deposits (FDs). Let’s consider an illustrative scenario using the FD interest rates offered by the State Bank of India (SBI) over the years.

Assuming an SBI FD interest rate of 7.5% per annum for the last eight years, a fixed deposit of Rs 1,00,000 in 2015 would have grown to approximately Rs 1,81,202 in 2023, considering simple interest.

Now, let’s compare this with the performance of the SGB Series 1, 2015. At the time of early redemption in 2023, the projected redemption price is Rs 6,047 per unit. If an investor had initially invested Rs 1,00,000 in SGBs in 2015, the value would have grown to approximately Rs 2,25,298 marking a significant outperformance compared to the FD scenario.

This comparison highlights the potential for higher returns with SGBs, especially with the added advantage of the gold market’s performance. Investors should consider their risk tolerance, investment goals, and market conditions before deciding between SGBs and FDs.


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