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What are the expected returns on Sovereign Gold Bonds?
The returns generated by Sovereign Gold Bonds are a combination of the fixed interest income earned semi-annually and capital gains/loss generated during the tenure. The interest of Sovereign Gold Bond is calculated at 2.5% p.a. on the initial investment amount and paid semi-annually to the investors. Additionally, investors would also benefit from the capital appreciation in addition to earning interest income.
Sovereign Gold Bond Return Calculator
Investors can use various online Sovereign Gold Bond return calculators to estimate the returns on their investments. Such online calculators are easy for anyone to use and provide accurate results without the risk of human error. Investors holding their SGBs in the demat form can use their stock broking platforms to check returns on their SGBs.
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Factors Influencing SGB Returns
The returns on Sovereign Gold Bonds are not fixed and are affected by a combination of factors. Here are some of the factors that impact the returns of SGB:
- The fixed interest component – The interest component, currently set at 2.5% p.a., are credited semi-annually throughout the bond’s holding period. This rate remains fixed throughout the tenure of the bond.
- Redemption price set by the RBI: If the bond is held till maturity, the redemption price would be factored in, which will be based on simple average of closing price of 999-pure gold of previous 3 business days from the date of repayment as published by the India Bullion and Jewellers Association Limited (IBJA). As a result, the potential capital gains/loss from SGB depends on the changes in the gold prices.Investors opting for premature redemption after completing 5th year from the date of bond issue can redeem it only on the coupon payment dates. For such cases also, RBI sets the redemption price using the same IBJA-linked pricing mechanism. Therefore, whether earlier through the limited premature redemption windows allowed by the RBI or redeemed on maturity dates, SGB returns will largely depend on the gold price prevailing near the redemption/premature redemption dates.
- Market price of SGB in the secondary market: For investors opting to purchase and/or sell their SGBs through the secondary market, their returns would primarily depend on the traded price of their bond holdings. The market price of various SGB series vary depending on various factors including demand and supply of the respective SGB series, their residual tenure and liquidity. The market prices of Sovereign Gold Bonds can be at premium or at discount to gold prices published by the IBJA. These price variations can have a significant impact on the SGB returns, independent of gold price movements.
How to Maximise your SGB Returns?
The primary objective of maintaining exposure to gold in one’s portfolio is to provide a hedge against its equity exposure. Gold and equities usually have a negative correlation. Gold as an asset class usually generates higher returns during bearish equity markets, economic shocks, high inflationary conditions and geopolitical tensions. Thus, investors should avoid using exposure to gold for wealth creation or to generate higher returns. However, investors can still try to optimise their returns from SGB by following the undermentioned tips:
- Stay invested till maturity – Holding SGBs till their maturity dates saves their investors from incurring capital gains tax liability. Gains realised within 1 year of bond purchase would be considered as short-term capital gains and taxed as per the investor’s tax slab rate. Gains realised after 1 year of SGB purchase would be considered as long-term capital gains and taxed @ 12.5%
- Purchasing SGBs during falling gold prices – Like other asset classes, gold prices too fluctuate due to factors geopolitical events, central bank policies, macro-economic factors, etc. When gold prices decline, investors can increase their exposure to SGBs in a staggered manner to reduce their investment cost and thereby, generate higher returns.
- Opting for early redemption/sale – If the investor is convinced that the gold prices have reached or about to reach its peak, then they can opt for premature redemption of their SGB holdings or sell them in the secondary markets to book their gains. However, while doing so, they should also factor in the impact of taxation as any gains booked before the SGB maturity dates are subject to capital gains tax.
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Impact of interest rates on SGB returns
There is a widespread belief that interest rates and gold prices share an inverse relationship, which means that the gold prices fall when interest rates rise. However, there is historical evidence showing that this relationship is not always consistent. For example, during the 1970s, gold prices appreciated significantly even as interest rates were high and rising.
Apart from interest rates, several other factors influence the gold prices, including demand and supply of gold, inflation trends, government policies, geopolitical conditions, currency movements and global economic conditions. These factors, in turn, play a crucial role in determining gold prices and consequently, impacting SGB returns.
Tax benefits & implications on SGB returns
The interest income earned on Sovereign Gold Bonds is taxable as per the investor’s income tax slab rate. However, one of the major advantages of SGB that sets them apart from other gold investment alternatives is that the capital gains realised on redeeming SGB at maturity is exempt from tax for individual investors. If sold before maturity, capital gains tax applies based on the holding period. SGBs held for a period of less than a year will be considered as short-term capital gains and taxed as per the investor’s tax slab rate. SGBs held for more than a year will be considered as long-term capital gains, which would be taxed at 12.5%.
