Sovereign gold bonds premature withdrawal in May can get 16.5% returns; key points to keep in mind while exiting SGB early How much tax will you have to pay if you withdraw prematurely? ET Wealth Online explains the nitty-gritty of premature withdrawal of sovereign gold bonds and the key aspects an investor must consider before going for it
A handful of sovereign gold bonds (SGBs) are due for early withdrawal in May. You can prematurely withdraw your sovereign gold bond investment once it completes the fifth year. As gold prices continue to rise above Rs 71,000 per 10 grams, investors can expect attractive returns from their sovereign gold bond investments.How much tax will you have to pay if you withdraw prematurely? ET Wealth Online explains the nitty-gritty of premature withdrawal of sovereign gold bonds and the key aspects an investor must consider before going for it.
How much return can you expect from your sovereign gold bond investment?
Issued on November 20, 2017, Sovereign Gold Bond 2017-18 Series VIII will be up for premature redemption on May 20, 2024. Let's find out how much return investors can expect from this gold bond tranche.The Reserve Bank of India (RBI) determines the premature redemption price of SBGs based on a simple average of three days’ closing prices of 999 purity gold. The three days taken into consideration are the ones preceding the maturity date. The prices of gold published by the India Bullion and Jewellers Association (IBJA) are used for the calculation. Accordingly, the simple average closing price of gold (999 purity) for the past three business days — April 26, 29, 30 — will be Rs 7,218 (calculated as of May 1, 2024). Hence, we can assume that the premature redemption price of Sovereign Gold Bond 2017-18 Series VIII will be Rs 7,218 per gram.
Sovereign Gold Bond 2017-18 Series VIII was issued at Rs 2,961 per gram on November 20, 2017. It was offered at a fixed interest rate of 2.5% per annum on the initial investment. The interest is paid on a semi-annual basis.
So, if you have invested Rs 1 lakh in Sovereign Gold Bond 2017-18 Series VIII, you will get Rs 2.43 lakh if you prematurely withdraw it this month, including the half-yearly interest payout calculated till May 20, 2014. You would have earned an interest of Rs 1,250 every six months for a tenure of seven years.
In terms of XIRR or Extended Internal Rate of Return, Sovereign Gold Bond 2017-18 Series VIII will offer 16.5% returns on the current gold price. The final return will come down or go up if gold price falls or rises closer to the maturity date.
Sovereign gold bond: How much return can you expect?
NameSovereign Gold Bonds 2017-18-Series-VIII
Sovereign Gold Bonds 2017-18-Series-IX
Issue Date
20-Nov-17
27-Nov-17
Issue price (per gram) (Rs)
2,961
2,964
Maturity value (assumed at current price) (Rs)
7,217
7,217
Premature withdrawal coupon payment date
20-May-24
2-Mar-24
Interest Rate
2.50%
2.50%
Interest Frequency
Semi-annually
Semi-annually
XIRR (At current gold price)
16.50%
16.44%
Gold price as of May 1, 2024
During this SGB period (November 1, 2017, to April 30, 2024), the Nifty50 index generated around 13.62% returns (CAGR) while the Nifty50-TRI gave 13.93% returns.
How is sovereign gold bond taxed? Know about taxation of SGB
According to the FAQs related to SGB on the RBI website, “Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long-term capital gains arising to any person on transfer of bond.”Now the question is whether the exemption for capital gains on redemption will be applicable for early redemption as well. S Chadha, Tax Partner and Mobility Leader, EY India, says, "Section 47(viic) of the Income-tax Act, 1961, specifically excludes redemption of SGB’ from the definition of ‘transfer’ which has the effect of exempting it from capital gains. However, Section 47(viic) does not distinguish between ‘redemption on maturity’ and premature redemption. Although the issue is debatable, it is fairly arguable that redemption will include pre-mature redemption of SGBs by the issuer as per the terms of the issue of SGB. Hence, capital gains will not get attracted for premature redemption of SGBs as well."
Yogesh Kale, Executive Director, Nangia Andersen India, says, "As the said provision mentions only redemption, both redemption on maturity and premature redemption, should be covered by the exemption. However, some tax experts believe that only redemption on maturity (after eight years) is exempt."
Do keep in mind that the sale of SGB on the stock exchange is taxable as long-term capital gains (if held for 36 months or more) or short-term capital gains (if held for less than 36 months). Indexation benefit is available for long-term capital gains, Kale says.
Taxpayers should keep in mind the following points while selling SGBs on the stock exchange, he adds:
a) Capital gain resulting from the sale of SGB on the stock exchange is taxable irrespective of whether it is sold within or after 5 years of issue.
b) In case of long-term capital gain, taxpayers may explore exemption available under Section 54F of the Income-tax Act, 1961. SGB is quite thinly traded on stock exchanges, and many a time at a discount.
Kale further adds, "Redemption of SGB by taxpayers other than individuals is not exempt. Such taxpayers should be mindful of factoring this into advance tax calculation."
Key things you need to keep in mind while prematurely withdrawing sovereign gold bond
a) Apply during the 21-day window: If you want to prematurely withdraw the Sovereign Gold Bond 2017-18 Series VIII, you have to submit a request to the receiving offices/NSDL/CDSL/ RBI Retail Direct between April 20, 2024, to May 10, 2024. There is a 21-day window to submit a premature redemption request of SGB. If you are planning for an early withdrawal of your SGB investment, keep track of the request submission dates. They are available on the Reserve Bank of India website.b) No additional charges to withdraw SGB: No direct charges are applicable on premature withdrawal of SGBs, says Nirav Karkera, head of research, at Fisdom.
c) How will the money be credited after premature withdrawal of SGB? The proceeds will be credited to the customer’s bank account which is provided at the time of applying for the sovereign gold bond, says Abhishek Soni, founder of Tax2Win.
Should you go for premature withdrawal of SGB?
"Ultimately, whether to redeem your SGB holdings before maturity depends on your personal financial goals, market outlook, and need for liquidity. Currently, the prices are almost up by 20% in the past few months and it may look tempting to sell now. Ideally, investment in gold is considered to balance your portfolio against all odds as it is the most stable asset class and it is always for the longer term," says Soni.Experts give a checklist for investors who are planning to withdraw their SGB investment prematurely:
i) Financial need: If you have immediate financial needs, you can think of withdrawing your SGB investments early.
ii) Asses gold allocation in your portfolio: Gold is considered a safe-haven asset and is often used as a hedge against inflation. Investors with strategic allocations to gold through SGBs should reassess their portfolio allocation. A typical allocation to gold ranges from 5% to 10% of the portfolio. If the allocation exceeds this strategic allocation, investors can consider a premature withdrawal and reallocate the excess to other asset classes, says Karkera.
iii) Check gold price: "Investors need to monitor the current trend in gold prices closely. While gold prices are high now, it's crucial to assess whether this trend is likely to continue or if it's a temporary surge. Factors such as geopolitical tensions, economic indicators, and inflation expectations may influence gold prices," says Suresh Surana, Founder, of RSM.
"The likelihood of gold crashing to all-time lows in the next three years is low. The historical surge in gold is continuing despite higher interest rates and an uncertain global environment. Since higher interest rates make fixed-income investments like bonds more attractive, money tends to flow out of gold and into high-yielding investments as rates rise," says Karkera.
iv) Do you have a better investment option than SGB?
Do you have better investment opportunities where the returns could potentially exceed or outperform the returns that you would earn by holding the SGB until maturity?Surana says, "Investors need to evaluate the opportunity cost associated with premature withdrawal of their SGB holdings by considering alternative investment opportunities. Investors may compare the potential returns, risks, and liquidity of these alternative options with the benefits of holding onto their SGB investment until maturity."
v) Keep in mind how it will be taxed: One of the significant advantages of holding SGBs until maturity is the tax treatment. The capital gains on the redemption at maturity are tax-free. This is not the case if you sell the bonds in the secondary market before maturity or prematurely withdraw, where capital gains are taxed as short/long term, as applicable.
vi) SGB maturity benefits: SGBs mature after eight years and the redemption is at the prevailing gold price. If you hold the bond until maturity, you also receive an additional interest of 2.5% per annum on the initial investment amount, which enhances your overall returns in addition to tax benefits.
This story originally appeared on: India Times - Author:Faqs of Insurances
