The sovereign gold bonds were launched back in 2015, when the first issue hit the market in the month of November 2015. The issue price for this offer was Rs 2,684 per gram.
At that point, there were a lot of doubts in the minds of investors about whether this would be an investment that would turn a profit. The long time period of the investment of eight years seemed to be a risk factor, too, as no one knew how gold prices would move. The government tried to make the sovereign gold bonds attractive by giving an annual interest of 2.5% and making the capital gains tax-free if the bonds were held till maturity.
Now, as the bonds inch closer to maturity (the first tranche maturity is in November 2023), the early adopters of the sovereign gold bonds are sitting pretty. On the one side, gold prices have rallied over the last few years and today, they have more than doubled from the levels that they paid in this issue of the sovereign gold bonds. Many bond-holders may be tempted to make use of the sky-high market prices and book their gains. These individuals should remember that at this stage, a little patience will pay bigger dividends in the form of tax saving.
The tax provisions say that if the sovereign gold bonds are held till maturity, there will be no tax on the capital gains. Since the investors in the first tranche of these bonds are likely to end up with significant capital gains, due to the appreciation in the value of gold price, it will be even better for them to make the gain tax-free. This means ensuring that they continue to hold the bonds for the next few months. The end benefit is that their net returns could soar. That’s because of the 2.5% annual interest and the capital gains without any tax impact.
Selling before the maturity date will mean a long-term capital gains tax to be paid, because even after considering indexation benefit, a significant portion of the gains will end up being taxable at 20%. Unless there is a dramatic change in the situation for gold in the next few months, the smart strategy now is to wait it out till maturity.
