Hold on to sovereign gold bonds as prices may rebound, say experts

Gold has indeed lost its sheen in the recent past, correcting 20.1 per cent from its peak of Rs 55,901 on August 7, 2020. Experts say those who need the money may redeem it
Sovereign gold bonds (SGBs) have a tenor of eight years, but investors can redeem them prematurely after five. One tranche of the bond — SGB 2.75 per cent March 2024, Tranche III (NSE Symbol: SGBMAR24) — is due for premature redemption on March 29.

Jharna Agarwal, head, Anand Rathi Preferred, says, “Investors who invested in this tranche will see around 10 per cent compounded annual return due to the unprecedented rally seen in the yellow metal over the past two years.” 

Investors can exit by handing them back to the bank or post office purchased from. Such exits can happen on coupon payment dates (twice a year).

The bonds also trade on exchanges, but volumes are not large and they usually trade at a discount. So, selling on exchanges can lead to losses.


Who should redeem?

Gold has indeed lost its sheen in the recent past, correcting 20.1 per cent from its peak of Rs 55,901 on August 7, 2020. Experts say those who need the money may redeem it.

“A 10-per cent compounded annual return is decent. The third tranche of SGBs up for redemption on March 29 is a good opportunity to book profits,” says Agarwal.

She adds that with interest rates rising internationally and investment demand from central banks decelerating globally, the near-term outlook for gold is not positive. 

If you want to exit, act quickly.

The Reserve Bank of India’s rules are as follows: Request for premature redemption can only be entertained if the investor approaches the bank/post office at least one day before the coupon payment date.

Experts suggest providing a 10-day buffer. The proceeds will be credited to the bank account you provided while applying.

Who should stay put?

If you don’t need the money, stay put as experts believe gold’s price could rebound.

Ajay Kedia, director, Kedia Advisory, says, “There is ample scope for gold to scale its previous highs once again for several reasons: Increased liquidity due to global stimulus measures, Covid-related uncertainty, vaccine-related issues in Europe, global bankers projecting 5-6 per cent fall in the US dollar, and inflation concerns.”

In short, the bearish sentiment towards gold could change over the medium term.

Pay tax on early exit

SGBs enjoy special tax treatment, which makes it attractive to hold it till maturity. Gopal Bohra, partner, N.A. Shah Associates, says, “No capital gain tax is payable by an individual on redemption of SGBs on maturity after eight years.”

On the other hand, if you redeem after the fifth year, your capital gains will be taxed. 

“In case of early redemption/encashment of the bond after five years, the long-term capital gains will be taxed at 20 per cent with indexation plus surcharge and cess,” says Bohra.




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