Gold bond turns Rs 1L investment into Rs 4.48L

The Reserve Bank of India (RBI) has announced the final redemption price for Sovereign Gold Bond (SGB 2018-19 Series-III, issue date November 13, 2018). According to a statement from the RBI, gold bond investors will have the option to redeem this SGB tranche prematurely on November 13, 2026.

The tenure of SGB is eight years and the premature redemption of the SGB series is permitted after the fifth year from the date of the issue of such gold bonds on the date on which interest is payable, as per the statement from the RBI.

The gold bond series' redemption price is calculated based on the simple average closing price of the gold of 999 purity published by the India Bullion and Jewellers Association (IBJA) for the preceding three working days, the RBI statement further said.

The final redemption price due on November 13, 2026, has been fixed at Rs 14,024 per unit of the SGB, based on the simple average of the closing price of gold for the last three business days, i.e., November 10, November 11 and November 12, 2026.

The SGB 2018-19 Series-III was issued at Rs 3,133 per gram for online purchases. It will yield an absolute simple return of around 348% on the date of the final redemption.

The absolute return is Rs 14,024 − Rs 3,133 = Rs 10,891. (without factoring in the interest). In percentage terms, it is Rs 10,891 ÷ Rs 3,133 × 100 = 347.59%.

A 347.59% return means that an investment of Rs 1 lakh in this SGB has grown to approximately over Rs 4.48 lakh.

As per the HDFC Bank website, "Capital gains at maturity (8 years) are tax-free, incentivising long-term investment. Early redemption or selling in the secondary market subjects gains to standard short-term or long-term capital gains tax."

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price and the bonds are redeemed and paid back to investors on maturity. The gold bond is issued by the RBI on behalf of the central government.

The bonds bear interest at the rate of 2.50% (fixed rate) per annum on the amount of the initial investment. However, SGBs issued in the Financial Year 2015-16 offered an interest rate of 2.75%.