Sovereign Gold Bonds (SGBs)

Why SGBs Have Been a Valuable Investment

SGBs provide two returns: capital appreciation linked to gold prices and a fixed annual interest of 2.50 percent, paid semi-annually. For example, a 1-gram investment at ₹6,263 in February 2024 earns an annual interest of ₹156.58 (₹78.29 every six months). Over eight years, this interest grows with gold price changes.

Historically, SGBs delivered strong returns. Bonds from 2016–17 matured in 2024, with redemption values at ₹7,788 per gram. This shows a 159 percent increase from the original issue price of ₹3,007. SGBs also act as a hedge against inflation and currency risks since redemption values depend on the average gold price before maturity.

Tax efficiency adds to their benefits. Capital gains at maturity are tax-exempt. However, interest earnings are taxable under the Income Tax Act, 1961.

The Limitations and Risks of SGBs

SGBs are stable, but gold prices can be volatile. During strong equity market phases, gold prices may stagnate. In 2023–24, stock market rallies slowed gold's growth.

Accessibility can be limited. Subscription windows are periodic, so investors need to match their liquidity with tranche announcements. The final tranche in February 2024 was priced at ₹6,263 per gram for offline applications. Online applications were cheaper at ₹6,213.

The lock-in period also affects liquidity. Early exits are allowed after five years, but premature redemptions incur capital gains tax without indexation benefits after July 2024. For example, investors redeeming SGB 2019–20 Series II in July 2024 received ₹7,272 per gram, but these gains were taxed at slab rates.

How to Optimize SGB Investments

Planning for liquidity is crucial. With new issuances stopping after 2025–26, investors should hold bonds until maturity. This maximizes tax benefits and interest earnings. For bonds bought in 2024, maturity will be in 2032, with redemption values tied to future gold prices.

Using the secondary market for liquidity is also an option. SGBs are listed on stock exchanges, allowing investors to sell them through brokers. However, trading volumes are low. As of March 2025, secondary market premiums are between 3–5 percent above spot gold prices due to limited availability.

Tax optimization can enhance post-maturity returns. Investors can reinvest proceeds into tax-exempt assets under Section 54EC, such as bonds from infrastructure entities, to defer capital gains.

Diversifying your portfolio is key. Financial advisors suggest allocating 5 to 10 percent of total investments to SGBs for stability and inflation protection.

Final Thoughts

While SGBs are solid investments, their discontinuation marks the end of an era for gold-backed government securities. Investors should hold existing bonds until maturity to benefit from tax exemptions and interest earnings. With the government looking into gold-backed digital products and ETFs as future options, investors may need to rethink their diversification strategies after 2026.