All SGB series are listed in the secondary market and are available for trading in the cash segments of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Sovereign Gold Bonds (SGBs) are trading at a premium over their reference price on exchanges, driven by their tax advantages and attractive coupon rates. With speculation about fewer or no new issuances in the future, listed SGBs have gained even more popularity among investors.
By August 14, 2024, the closing prices of the top 15 most liquid SGB series were 8% higher than their reference prices.
According to the prices published on ibjarates.com, which serves as the reference rate for SGBs, these bonds are outperforming. Since 2015, the Reserve Bank of India (RBI) has issued 67 tranches of SGBs, amounting to a total of 14.7 crore units.
All SGB series are listed in the secondary market and are available for trading in the cash segments of both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Investors can buy or sell them through their demat accounts.
If no new issues are launched, the demand for these bonds is expected to increase further, which could push their prices even higher compared to the reference price.
For instance, on August 14, 2024, the closing price of the SGB IV Series (2023-24) on NSE was ₹7,930, approximately 12% higher than the reference rate of ₹7,079 for gold of 999 purity, as per IBJA’s rates.
SGBs have traded at a premium since their launch due to their additional coupon rates and tax exemptions upon maturity.
What Are Sovereign Gold Bonds?
SGBs are government-backed bonds issued by the RBI, offering investors an alternative to physical gold and Gold Exchange-Traded Funds (ETFs).
They come with an added advantage of annual coupon rates of 2.5% or 2.75%, making them more attractive compared to other gold assets.
Following the reduction of customs duty on gold and silver from 15% to 6% in the Union Budget 2024, the likelihood of new SGB issuances has decreased, leading to a drop in both gold and SGB prices.
Investors are concerned that this might reduce the returns on SGBs maturing in the coming months.
Deepak Jasani, Head of Retail Research at HDFC Securities, was quoted as saying in CNBC Awaaz report, “There were rumors that the reduction in gold import duties was due to the high bond returns.”
On July 25, 2024, Moneycontrol reported that the government might scale back or discontinue the SGB scheme due to its rising cost.
Jasani added, “With uncertainty surrounding future SGB issuances, investors who view SGBs as a good alternative to benefit from rising gold prices are willing to pay a premium for the existing series.”
Maturity and tax exemption advantage
In terms of taxation, SGBs outperform Gold ETFs and physical gold.
Investors who redeem SGBs upon maturity after eight years do not have to pay capital gains tax.
Additionally, those who opt for RBI’s premature withdrawal windows in the 5th, 6th, or 7th year also enjoy tax exemptions on capital gains.
However, if investors sell their SGBs outside of this window or on the stock exchange, capital gains tax applies.
Gains made from selling SGBs within 12 months are classified as short-term capital gains (STCG) and taxed according to the taxpayer’s applicable tax slab.
Long-term capital gains (LTCG) tax of 12.5% (plus surcharge and cess) applies if the bonds are held for more than 12 months.
Liquidity
Liquidity, or the trading volume, plays a crucial role when buying SGBs on exchanges. Some SGBs suffer from low liquidity, while high-liquidity bonds allow investors to buy and sell at desired prices.
Over the last three months, the daily average trading volume for SGBs across NSE and BSE has been ₹13.4 crore.
