SGB redemption price

A Sovereign Gold Bond is bought in cash and paid back in cash. No gold changes hands at either end.

So the scheme needs a rule for turning grams back into rupees on the day the bond matures. That rule is the redemption price.

The price is not the gold price at one instant. It is a short average, to stop a single odd day from deciding the payout.

The average is taken over the previous three working days before repayment. It uses the closing price of gold of 999 purity, as published by the India Bullion and Jewellers Association.

That is what the workbook means when it says the quantity of gold is protected. The investor pays for a number of grams and gets back the market value of those grams.

The formula in words. Redemption price = the simple average of the closing price of gold of 999 purity over the previous three working days from the date of repayment, published by the India Bullion and Jewellers Association Limited.

When it is used. The bonds mature on the expiry of 8 years from the date of issue. On maturity they are redeemed in Indian Rupees at that price.

How the money reaches the investor. Both interest and redemption proceeds are credited to the bank account furnished by the customer at the time of buying the bond. The RBI or the depository informs the investor one month in advance of the date of maturity.

The same three-day idea on the way in. Chapter 19's comparison of ways to hold gold records that for a Sovereign Gold Bond, every issue is priced based on the price prevailing on the last 3 days. So the entry price and the exit price are both short averages, not single-day quotes. That is why the workbook notes an investor cannot buy an SGB at the price prevailing at the moment, unlike physical gold or a gold ETF.

Interest is not computed on this price. The bonds bear interest at 2.50% per annum on the nominal value of the bond. The last interest is payable on maturity along with the principal. So a rising gold price raises the redemption amount but not the coupon.

Premature redemption. Early encashment is allowed after the fifth year from the date of issue, and repayment is made on the next interest payment date. The workbook states the three-working-day average as the basis for the redemption price from the date of repayment, without setting out a separate formula for an early exit.

The workbook gives the formula but no worked figures; the gold prices below are illustrative.

Mrs Sundaram holds 40 grams of Sovereign Gold Bonds bought at an issue price of Rs 4,800 a gram, so Rs 1,92,000 of nominal value. The bonds mature eight years later.

Suppose the IBJA closing prices of 999 purity gold on the three working days before the repayment date are:

Now see what the averaging does. If the price on the final day alone had been used, the payout would have been 40 x Rs 7,290 = Rs 2,91,600 — Rs 2,000 more. Average the three days and a single strong or weak close cannot swing the redemption on its own.

The coupon is a separate calculation, on the nominal value. Interest for the year is Rs 1,92,000 x 2.50% = Rs 4,800, paid as Rs 2,400 every half year, whatever gold does in the meantime. The last of those half-yearly payments arrives with the Rs 2,89,600 of principal.

Chapter 12 (Taxation of Other Products), section 12.2, gives the maturity paragraph: the 8-year tenor, redemption in Indian Rupees, the three-working-day simple average of the closing price of 999 purity gold published by IBJA, the crediting of proceeds to the registered bank account, and the one-month advance notice. Section 12.2.1 sets the 2.50% coupon against the nominal value. Chapter 19, section 19.2.7, adds the issue-side rule that every SGB issue is priced on the last 3 days. Expect a question on what the redemption price is based on, with the plausible wrong answers being the price on the maturity date, the issue price, and a price fixed by the RBI.

• Three working days, averaged — not the price on the maturity date. This is the single most commonly missed detail of the scheme.
• 999 purity is the reference, and IBJA publishes the price. The RBI issues the bond but does not publish the gold price used to redeem it.
• Working days, not calendar days. A holiday or a weekend is skipped.
• The 2.50% coupon is on the nominal value, not on the redemption price. A doubling of the gold price does not double the interest.
• The issue price is also a three-day figure. The workbook notes that an SGB cannot be bought at the price prevailing at the moment, which physical gold and a gold ETF allow.
• Redemption is in rupees, always. The bond cannot be exchanged for physical gold; the workbook's gold comparison table marks that as not available for an SGB.
• The price rule and the tax rule are different questions. What the redemption price is based on is this page. Whether the redemption is taxable is premature redemption of SGB and section 47.