Investors in the Sovereign Gold Bond (SGB) 2020-21 Series-III tranche are set to earn more than 219 per cent on their initial investment as the Reserve Bank of India (RBI) has announced the premature redemption price for the issue.
The redemption price has been fixed at Rs 14,774 per unit, compared with the issue price of Rs 4,627 for investors who had applied online. The redemption window opened on June 16, allowing eligible investors to exit after completing five years from the date of issue.
For investors who bought the bond at the time of issue, the sharp rise in gold prices has translated into significant capital gains, apart from the regular interest income paid by the government during the holding period.
How much has SGB 2020-21 Series-III gained?
The SGB 2020-21 Series-III was issued on June 16, 2020, when gold prices were significantly lower. The bond was issued at Rs 4,627 per gram for online investors, while those purchasing through other modes paid Rs 4,677 per gram.
At the premature redemption price of Rs 14,774 per gram, investors have gained Rs 10,147 per gram on the investment.
The absolute return works out as:
(Rs 14,774 – Rs 4,627) ÷ Rs 4,627 × 100 = 219.30 per cent
This means an investor who invested Rs 1 lakh in the bond at the time of issue would see the value rise to around Rs 3.19 lakh at redemption, excluding the additional interest income received over the years.
SGB investors also received interest at the rate of 2.5 per cent annually, paid semi-annually on the initial investment amount. This interest component further adds to the overall return.
Why is RBI allowing premature redemption now?
Under the SGB framework, investors cannot exit the investment immediately after purchase. RBI permits premature redemption only after completion of five years from the date of issue.
However, the redemption has to take place on the interest payment date. Since SGB 2020-21 Series-III was issued on June 16, 2020, investors completing the five-year holding period become eligible for premature redemption from June 16, 2026.
The redemption value is not decided randomly. RBI calculates the price based on the simple average closing price of 999 purity gold for the previous three business days before the redemption date. These prices are taken from rates published by the India Bullion and Jewellers Association.
Should investors redeem or continue holding?
While the 219 per cent gain may appear attractive, investors need to consider their financial goals before exiting.
SGBs have an eight-year maturity period, and investors who continue holding the bond until maturity receive the prevailing gold price at that time along with the interest benefit. The decision depends on expectations about gold prices, portfolio allocation and liquidity requirements.
For investors who already have sufficient gold exposure or need funds, premature redemption provides an opportunity to lock in gains. However, those looking for long-term gold exposure may choose to continue holding the investment.
Tax rules have changed for SGB investors
Tax treatment is an important factor before making a redemption decision. Recent changes in tax rules have reduced some of the earlier benefits available to SGB investors.
The exemption from capital gains tax at maturity is available only to original subscribers who hold the bond for the full eight-year period. Investors who sell before maturity through premature redemption may have to pay applicable capital gains tax.
Further, investors who purchased SGB units from the secondary market will not get the maturity tax exemption, even if they hold the bonds until maturity.
This means investors need to calculate post-tax returns before deciding whether to exit early.
SGB returns reflect gold rally
The performance of the 2020-21 Series-III tranche highlights how gold price movements can impact returns from government-backed gold investments. While the bond offered a fixed interest component, the majority of the gains came from the appreciation in gold prices over the six-year period.
For investors, SGBs remain a way to gain exposure to gold without holding physical gold, while also earning additional interest. However, liquidity, taxation and personal financial goals remain key factors while deciding whether to redeem or stay invested.
The government has discontinued fresh SGB issuances, but existing investors will continue to receive interest and redemption benefits as per the original terms.
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