How much returns can I get from Gold Bonds?
If you had this question, then the right answer is that the Gold Bonds give a return similar to the return of gold during your holding period + 2.5% annual simple interest.
But there is another angle to the returns of gold bonds. And that is about the Returns % on Premature Redemption of Gold Bonds (SGB).
The Sovereign Gold Bond lock-in period tenure is 8 years. But pre-mature redemption of the Gold bond is allowed from the fifth year onwards. You can exercise the early-redemption option after 5 years. So you can redeem your gold bonds at the end of the 5th, 6th, 7th, and 8th years (only on the scheduled dates for interest payment).
This early redemption is a kind of buyback facility provided by RBI. So when 5 years of a given Gold Bond tranche is about to get over, RBI declares the redemption price for the early redemption of that particular SGB Tranche. So if you decide to redeem early, you can do so.
The early redemption window for many of the earlier tranches of Gold Bonds had recently been open. So an analysis of the same can give some indication of the returns generated if one goes for early redemption.
So let’s see…
If you look at the gold bond issue price history, you will see that the following were the first 3 tranches of gold bonds:
- Gold Bond Scheme 2015 Series I Issue Price: Rs 2684/- per gram of gold.
- Gold Bond Scheme 2016 Series II Issue Price: Rs 2916/- per gram of gold.
- Gold Bond Scheme 2016 Series II Issue Price: Rs 2600/- per gram of gold.
Now here is the early redemption price for these tranches.
- Gold Bond Scheme 2015 Series I Issue Price was to be redeemed at Rs 4837 per unit against Rs 2684 issue price. Read about the redemption price details on the RBI website here. That’s a solid return of about 81% in 5 years. Or annual average returns of 12.5% CAGR.
- Gold Bond Scheme 2016 Series I Issue Price was to be redeemed at Rs 4804 per unit against Rs 2916 issue price. Read about the redemption price details on the RBI website here. That’s a solid return of about 65% in 5 years. Or annual average returns of 10.5% CAGR.
- Gold Bond Scheme 2016-17 Series I Issue Price was to be redeemed at Rs 4804 per unit against Rs 3119 issue price. Read about the redemption price details on the RBI website here. That’s a return of about 54% in 5 years. Or annual average returns of 9.0% CAGR.
So those are the Sovereign Gold Bond prices, Sovereign Gold Bond Early Redemption prices and Sovereign Gold Bond returns, and in a way, Sovereign gold bond Return Calculator.
Do note that I have not considered the additional returns in form of 2.75% or 2.5% annual interest paid out.
You may ask about the Tax Implications of Early Redemption of Gold Bonds.
You can even redeem gold bonds before maturity and after completion of the 5th year. The capital gains generated at early redemption after the 5th and up to the 8th year are taxed at 20% post indexation. Do read more about the Gold Bond taxation.
So all said and done, Should you withdraw or stay invested in Gold Bonds when you get an option for early redemption?
I have written in How much Gold to Invest in your Portfolio? that one should limit your gold exposure to 5-15% of your long-term portfolio. So if it exceeds that, then you can consider getting out else you can remain invested.
Further Reading – Gold Bonds and ETFs for long term
So that was about the premature redemption of Sovereign Gold Bond schemes and whether you should take RBI’s exit window to redeem pre-maturely from the SGBs or not?