Sovereign Gold Bonds (SGBs) are currently trading at a noticeable premium compared to their reference prices. As of August 14, 2024, the top 15 liquid SGB series are priced, on average, about 8% higher than their reference rates. The reference rate is based on the price of gold with 999 purity as published on ibjarates.com.
Factors Driving the Premium
Demand and Supply Dynamics
Since their introduction in 2015, the Reserve Bank of India (RBI) has launched 67 SGB tranches, issuing a total of 14.7 crore units. These bonds are listed on secondary markets and traded on the BSE and NSE. Due to the absence of new issues, demand for existing bonds has risen, contributing to their increased prices.
For instance, the most actively traded SGB series, SGB 2023-24, Series IV, closed at Rs 7,930 on August 14, 2024, on the NSE. This price is approximately 12% higher than the IBJA 999 purity gold rate of Rs 7,079.
Additional Benefits of SGBs
SGBs have consistently traded at a premium due to the additional benefits they offer over other forms of gold investments. These benefits include an annual coupon rate of 2.5% to 2.75% and tax exemptions upon maturity.
What Are Sovereign Gold Bonds?
SGBs are government-backed bonds issued by the RBI, designed to provide an alternative to physical gold and gold ETFs. Unlike these other gold assets, SGBs offer a fixed annual coupon rate and tax benefits, making them an attractive investment option.
Tax Benefits
One of the major advantages of SGBs is their tax treatment. At maturity, individuals do not have to pay capital gains tax on SGBs. Additionally, if SGBs are redeemed using the RBI’s premature withdrawal option at the end of the 5th, 6th, or 7th year, capital gains are also exempt. However, if SGBs are sold on the stock exchange or outside the premature withdrawal window, they are subject to capital gains tax. Short-term capital gains (STCG) are taxed at applicable slab rates, while long-term capital gains (LTCG) are taxed at 12.5%, plus any applicable surcharge and cess.
Bleak Outlook for New Issuances
Impact of Customs Duty Reduction
Recent changes, such as the reduction of gold and silver import duties from 15% to 6% as per the Union Budget 2024, have led to a drop in gold prices. This has raised concerns among investors about potential impacts on the returns from SGBs maturing in the near future.
There are also rumors that the government might reduce or discontinue the SGB scheme due to its cost implications. Deepak Jasani, Head of Retail Research at HDFC Securities, notes that the reduction in gold import duties might be linked to the high returns offered by SGBs. This uncertainty regarding future SGB issuances is leading investors to pay a premium for current series bonds, anticipating potential benefits from future gold price increases.
Importance of Liquidity
Liquidity Considerations
Liquidity plays a crucial role in trading SGBs. Bonds with higher liquidity tend to offer better pricing. Over the past three months, the daily average traded volume of SGBs on both the NSE and BSE was Rs 13.4 crore. Investors should consider liquidity when buying SGBs on the exchanges to ensure favorable pricing and transaction ease.
