The Sovereign Gold Bond (SGB) Scheme, designed to allow investments in gold through a digital format, is a popular investment option for resident individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions. These bonds, denominated in grams of gold, require a minimum investment of one gram and have an eight-year tenure, with an exit option available after the fifth year on interest payment dates.
Key Features of the SGB Scheme
Investors in the SGB scheme benefit from several attractive features:
- Fixed Annual Interest: The bonds offer a fixed annual interest rate of 2.5%, payable semi-annually.
- Redemption Price: The redemption price of the bonds is linked to the prevailing market price of gold at maturity.
- Capital Gains Tax Exemption: Capital gains tax arising on redemption is exempted for individual investors.
- Collateral for Loans: The bonds can be used as collateral for loans, enhancing their attractiveness.
- Tradeability: SGBs can be traded on stock exchanges, offering liquidity.
Government’s Potential Withdrawal of the SGB Scheme
Recent reports indicate that the government might scale back or even discontinue the SGB scheme, considering it too costly. This potential change aligns with the Union budget’s decision to reduce customs duties on gold and silver from 15% to 6%. The reduced customs duty is expected to decrease the demand for Sovereign Gold Bonds.
Impact of Customs Duty Reduction on SGB Prices
The reduction in customs duties has already had a noticeable impact on SGB prices:
- The tax cut has caused a significant drop in gold prices on the Multi Commodity Exchange (MCX), with prices falling by over Rs 4,000 to Rs 68,900.
- Similarly, SGB prices on the National Stock Exchange (NSE) decreased by 2-5%. For instance, SGBAUG24 fell by 2.6% to Rs 7,275 per unit, while SGBDEC2513 saw the most substantial drop of 5.98% to Rs 7,550.
Historical Context and Future Redemptions
The initial tranche of SGBs, issued on November 30, 2015, reached its final redemption in November 2023. Investors in the SGB scheme 2016-17 Series I, issued in August 2016, are approaching their final redemption, scheduled for the first week of August 2024. The original issue price of the Sovereign Gold Bond 2016-17 Series I was Rs 3,119, with an annual interest rate of 2.75%.
Conclusion
The potential discontinuation of the Sovereign Gold Bond Scheme, coupled with the recent reduction in customs duties on gold and silver, highlights the shifting landscape of gold investment in India. Investors should closely monitor these developments and consider the implications for their investment strategies.
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