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Impact of Customs Duty Change on Sovereign Gold Bonds
Context:
Government reduced customs duty on gold from 15% to 6% in the Union Budget 2024-25. This led to a decline in domestic gold prices, which is expected to negatively affect returns on SGBs.
Impact of Budget Changes on Sovereign Gold Bonds (SGBs):
- The Budget also proposed reducing the holding period for gold from 36 months to 24 months for long-term capital gains (LTCG) tax.
Changes in Taxation and Holding Period:
- The LTCG tax rate was lowered from 20% with indexation to 12.5% without indexation.
- These changes further contribute to the decline in gold prices and the expected returns on SGBs.
Redemption Value Linkage:
- The redemption value of SGBs is linked to the prevailing gold price at the time of redemption.
- As a result, any decrease in gold prices directly impacts the redemption value.
- Upcoming redemption of SGBs from 2016-17 Series I is particularly affected.
- As these were issued at a price of Rs 3,119 and now expected to yield lower returns due to recent customs duty cuts.
Investor Returns:
- The Compounded Annual Growth Rate (CAGR) for SGB 2016-17 Series I, maturing in August 2024 stands at approximately 10.4%.
- If customs duty had not changed, returns could have been 6-7% higher.
- Market Reaction: Following the Budget announcement, gold prices fell nearly 5%, with spot prices dropping to Rs 69,296 per 10 grams from Rs 72,875 per 10 grams. This decline was reflected in SGB prices on the National Stock Exchange (NSE), with significant reductions observed across various series of SGBs.
Sovereign Gold Bonds (SGBs)
- These are government securities measured in grams of gold, alternatives to owning physical gold, issued by the RBI on behalf of the Government.
- Investors purchase these bonds with cash, and upon maturity, redeemed in cash.
- The minimum investment required is one gram.
- Individuals can invest up to 4kg per fiscal year, Hindu Undivided Families (HUFs) can invest up to 4kg, and trusts/similar entities can invest up to 20kg.
- For joint holdings, the maximum investment limit applies to the first applicant for that specific application.
- The annual investment limit includes bonds bought in different batches directly from the government and those purchased from the secondary market. However, this limit does not count any bonds held as collateral by banks and other financial institutions.
- The government initiated the SGB scheme under the Gold Monetisation Scheme.
SGB Popularity and Advantages:
Despite recent developments, SGBs remain a popular choice among investors due to the following seven reasons:
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Gold Monetisation Scheme (GMS), 2015
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