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First sovereign gold bond (SGB) issue investors to get a bonanza on maturity

First sovereign gold bond (SGB) issue investors to get a bonanza on maturity

The first tranche of SGB, which was issued by the RBI on November 26, 2015, is set to mature as the bond completes its 8-year years. Those long-term investors who invested in the batch of sovereign gold bonds (SGB) and held them to maturity are waiting to reap healthy profit and capital gain on the investment they made. The investment is set to reap healthy gains as gold prices have more than doubled in the last eight years, plus the 2.75% interest that those bonds carry. The interest rate on the sovereign gold bond offer has been revised down to 2.5%.

Also read -: What are Sovereign Gold Bonds

In 2015, the purchase price for the first SGB issued was fixed at Rs 2,684 per gram of gold, and the current gold price is trading around Rs 6,100 per gram. The maturity price of the SGB is yet to be determined by the RBI, but seeing how high the gold rate has come, the bonds will yield good returns on maturity. Currently, the RBI is announcing the premature redemption price of the SGB scheme for the 2017-18 series, which is set above Rs 6,000 per gram of gold based on the simple average closing price for gold of 999 purity published by the India Bullion and Jewellers Association (IBJA). The SGB scheme allows early redemption of gold bonds after the fifth year from the date of issuance, coinciding with the interest payment date.

With the value doubling in more than eight years, the investors have earned an annual growth rate of almost 11%, coupled with 2.75% interest, which is paid annually. So the returns of the first bond are a phenomenal 13.5%.

From a taxation perspective, the gains earned by an individual from a sovereign gold bond at the time of redemption or maturity are totally exempt. For example, if someone had invested Rs 50,000 in 2015, they would receive about Rs 1,10,000 on redemption. The capital gains of Rs 60,000 on redemption would be exempt in his hands, and no tax is required to be paid. However, if the bonds are transferred or sold before maturity, the profits made on the sale of these bonds will be subjected to taxation as long-term capital gains, following the regulations outlined in the Income Tax Act of 1961. The tax would be applicable on the 2.75% yearly interest.

Issue price of SGB Rs 2684 per gram
Gram of Gold 50 gram
Investment amount 134200
Assuming Redemption price Rs 6100 per gram
Redemption amount Rs. 305000
Yearly interest @ 2.75% 29524
CAGR 10.81%
Annual return 13.56% (10.81+2.75%)
P/L return 149%

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