The Reserve Bank of India (RBI) has announced that the first Sovereign Gold Bonds (SGBs) issued in India SGB 2015 Series I can be redeemed at Rs 6,132 per unit from November 30, 2023, with annual returns up to 12.9 per cent returns.
Initially priced at Rs 2,684 per gram, these bonds now yield 128.5 per cent on absolute basis when redeemed at Rs 6,132 per gram, and 152 per cent gross return when added with interest. Simply, a gram of SGB 2015 Series I bought in 2015 now appreciated by Rs 3,448, in addition to interest payment of Rs 627.
At 2.75 per cent interest, Rs 2,684 in SGBs yielded Rs 37 every 6 months and Rs 627 in total interest over 8 years, totalling to Rs 6,759 when it reached final redemption.
According to the tax provisions, if the sovereign gold bonds are held till maturity, there will be no tax on the capital gains. This is its advantage over other investment options. But the interest will be taxed at slab rates. If taxed at 10 per cent, every six months you will receive Rs 33 which totals to around Rs 6,696, including gold value. According to RBI, the average annual return comes to 12.9 per cent.
The three most popular equity mutual funds having the highest net AUM are large-cap funds, flexi-cap funds and small-cap funds. They have given 10-year category average returns of 15 per cent, 17.19 per cent and 23.56 per cent respectively.
The top performers have given 18 per cent, 24 per cent and 29 per cent in 10 years. While these returns or gains are taxable at 10 per cent post-indexation the interest amount is only taxed when it comes to SGBs.
Compared to equity mutual funds with taxable returns, SGBs offer comparatively lower but steadier returns. Equity funds yielded higher returns but returns are taxable and they are considered riskier, especially small-cap funds.
Large banks on FDs over 5-year tenure offer around 7 per cent for general citizens which would further come down after tax liability. Small finance banks would have given higher returns but their risk would have been higher.
Avinash Luthria, SEBI RIA at Fiduciaries, notes gold's volatility, tax efficiency and illiquidity. Lutharia says "Gold in the international market in US dollars lost 83 per cent of its purchasing power between 1980 and 2001 and is yet to reach its inflation-adjusted price from early 1980, that is, 43 years later. Gold has done much better in Rupees due to the significant depreciation of the Rupee and the import duty on gold. So, investors in gold should accept that they are investing in a risky asset which is as volatile as equity. Naturally, people would like to protect themselves against a large depreciation of the Rupee. However, the RBI and the Income Tax department have made it very difficult for resident Indians to invest outside India. So resident Indians have been pushed to invest in gold."
"SGBs are the most tax-efficient way to invest in gold. Investors should accept that SGBs are relatively illiquid and that they should be willing to hold the SGBs for 5 to 8 years," he added.
Swapnil Kendhe, another Sebi RIA, said that gold isn't necessary for portfolios, especially if equity allocations align with targets.
"Unlike Real Estate, Equity, and Debt, Gold is not a must-have asset class. It is perfectly fine to not have any Gold in the portfolio apart from personal use Jewellery. If an investor wants to add Gold in the portfolio for diversification, he can do that provided his equity allocation in the portfolio is closer to his target allocation," Kendhe said.