Eight years later, gold bonds deliver market-like returns

Against an issue price of ₹2,684 per gramme on 30 November 2015, the closing price of 24-carat gold was ₹5,929 per gm on Friday, translating into a compounded annual growth rate (CAGR) of 12%, including the interest component on the bond’s nominal value, adjusted for tax at the highest income slab of 30%. Gold rates used are determined by India Bullion and Jewellers Association.

Against this, the Nifty Total Returns Index, which includes dividends, generated a 13.82% CAGR, rising from 10,146 to 28,582 between early November 2015 and last Friday.

“The best part about this instrument is that, aside from earning the price difference, there is a component of interest rate on the issue price, making it a unique investment proposition,” said Amol Joshi, the founder of PlanRupee Investment Services.

Joshi said gold enjoys a twin advantage of being a hedge against inflation and a safe haven asset, which, along with international equities, should form the “satellite portion of the core portfolio of equities and debt”. “My recommendation is that 15% of a portfolio should comprise international equities and gold investment through SGB, which is a way better investment than that in physical gold.”

Gold bonds have been highly successful, with SGBs backed by a cumulative 109 tonnes of gold being subscribed over the past eight years. At the current price of ₹5,929 per gm, the value of the outstanding bonds is ₹64,650.5 crore against net assets held by gold ETFs of ₹22,339 crore as of June-end.

The first tranche of bonds has seen redemption of 54 kilogrammes (kg) against an issue of 914 kg. “The bonds will continue to attract investor interest, thanks to the handsome returns seen over the past eight years,” said Shekhar Bhandari, the president of global transaction banking at Kotak Mahindra Bank.

A long-term capital gains tax of 10% on equities kicks in above ₹1 lakh. In the case of gold bonds, there are no capital gains if held until maturity, but the interest is taxed at the applicable tax bracket of the investor.

The minimum investment in the bond is one gram with a maximum limit of 4 kg for individuals each fiscal year. Eligible investors include individuals, HUFs, trusts, universities, and charitable institutions. Each family member can buy the bonds in his or her own name if they fit into the bracket of eligible investors.

While benefits include tax-free capital gains and fixed interest payment payable semi-annually on the issue price, some of the risks include capital loss in case the market price of gold declines and the long tenure of holding, although an early exit option is given after the fifth year from the date of issue on coupon payment dates.

Of the total 110.4 tonnes subscribed for in the past eight years, only 1.3 tonnes have been prematurely redeemed.

Updated: 07 Aug 2023, 12:58 AM IST