Speculation rises that the government might end the Sovereign Gold Bond Scheme amid reduced customs duties on gold and falling bond prices.
The Sovereign Gold Bond (SGB) Scheme which allows various entities to invest in gold digitally, may face scaling back or discontinuation, Moneycontrol reported. The scheme offers a fixed annual interest rate of 2.5% and links the redemption price to the market price of gold. The capital gains tax on redemption is exempt for individual investors and SGBs can be used as loan collateral or traded on stock exchanges.
Recent reports suggest the government might reduce or even discontinue the scheme due to its high cost. This speculation follows the Union budget’s decision to slash customs duties on gold and silver from 15% to 6%. This reduction is expected to decrease demand for SGBs which has already led to a 2-5% drop in their prices on the National Stock Exchange (NSE).
Harsh Punjabee, Founder & CEO, SMEST Capital said, "There is speculation regarding the potential discontinuation of Sovereign Gold Bonds (SGBs) by the Reserve Bank of India. While no official announcement has been made, it’s important to discuss the potential implications for investors. SGBs have been a favoured investment for those looking to gain exposure to gold without the physical constraints and risks associated with storing the metal. They offer a dual benefit of capital appreciation linked to gold prices and a fixed interest income of 2.5% annually, making them a unique and attractive investment."
He added, "If SGBs were to be discontinued, investors might need to reconsider their investment strategies as this change could drive investors to explore other secure and stable investment options. They could turn to alternative instruments such as Corporate Bonds, Government Securities, etc. I believe that Fixed Income Instruments offer a compelling alternative, providing consistent returns and can be a valuable part of a diversified portfolio, especially in a fluctuating market.”
Previously, the gold and silver duties included a 10% basic customs duty and a 5% Agriculture Infrastructure Development Cess. This tax cut has also led to a notable decrease in gold prices on the Multi Commodity Exchange (MCX), with prices falling by over Rs 4,000 to Rs 68,900. The SGB prices on the NSE saw declines ranging from 2.6% to 5.98%, with specific bonds like SGBAUG24 and SGBDEC2513 falling to Rs 7,275 and Rs 7,550 per unit, respectively.
The SGB scheme, Initially launched on November 30, 2015, has seen its first tranche redeemed in November 2023. The 2016-17 Series I, issued in August 2016, is set for final redemption in early August 2024, with its original issue price at Rs 3,119 and an annual interest rate of 2.75%. The redemption price is calculated based on the average closing price of 999 purity gold for the three business days preceding the redemption date, as published by the India Bullion and Jewellers Association Ltd.