Why Sovereign Gold Bonds Are Trading at a Premium?
Sovereign Gold Bonds (SGBs) are currently trading at a 5-12% premium on exchanges compared to their reference price. As of August 14, 2024, closing prices of 15 most liquid SGB series were, on average 8% higher than their reference price. The reference price for SGBs is based on the gold rate with 999 purity, as published by the website.
One example of this is SGB 2023-24 Series IV. It had a closing price of Rs.7,930 on August 14, 2024, on NSE. This price was about 12% higher than the IBJA 999 purity gold rate of Rs.7,079 on the same day.
Why are SGBs Trading at a Premium?
SGBs have often traded at a premium due to several factors. One key reason is the additional interest (coupon rate) they offer which is usually around 2.5% to 2.75% annually. Additionally, SGBs provide tax exemption on capital gains if held until maturity. This is an attractive benefit for investors.
Uncertain Future of SGB Issuances
The future of SGB issuances is currently uncertain especially after Union Budget 2024 reduced customs duties on gold and silver from 15% to 6%. This reduction has led to a fall in gold prices including SGBs. Investors are concerned this could impact returns from SGBs maturing in the coming months.
There have been rumours that the government might reduce or even discontinue the SGB scheme due to the high costs associated with these bonds. This uncertainty has led to increased demand for existing SGBs driving up their prices on the market.
Tax Advantages of SGBs
One main advantage of SGBs over other forms of gold investment like gold ETFs and physical gold is favourable tax treatment. If investors hold SGBs until maturity of eight years they don’t pay capital gains tax. Even if they opt for premature withdrawal after the 5th, 6th or 7th year, they remain exempt from capital gains tax.
However, if SGBs are sold on the stock exchange before maturity, capital gains tax will apply. If sold within 12 months, it is considered a short-term capital gain and taxed according to applicable slab rates. For SGBs held for more than 12 months, long-term capital gains tax applies at 12.5% plus any applicable surcharge and cess.
Liquidity Considerations
When buying SGBs on exchange, liquidity is an important factor to consider. Bonds with higher liquidity are more likely to fetch better prices. Over the last three months, the daily average trading volume of all SGBs on both NSE and BSE was Rs.13.4 crore.
