Sovereign gold bonds (SGBs) have been in the spotlight recently after the government made changes to gold taxation. These adjustments have driven up demand for SGBs, leading them to sell at significant premiums on the secondary market.

While the government has reduced long-term capital gains tax on other gold investments, SGBs remain the most tax-efficient option, according to a Value Research note.

SGBs are known for providing tax-free returns on maturity and an additional 2.5% annual interest over the price of gold.

Surprisingly, even the government’s decision to reduce gold import duties from 15% to 6% has not dampened the appeal of SGBs.

Instead, it has further fuelled investor demand, the note said.

As of September 2, 2024, all 63 listed SGBs on the stock exchange were trading above the market price of gold, which stood at ₹7,144 per gram.

Premiums range from 1.48-12.96%, with bonds maturing in the distant future attracting higher premiums.

For instance, SGBs maturing in more than five years have a 9.4% premium, while those maturing within three years carry an average 3.5% markup.

The 10 most expensive SGBs

are dominated by longer-maturing ones, with the top three being SGBs maturing in February 2032, December 2031, and June 2031, which carry premiums of 13%, 12%, and 11%, respectively.

SGB	Premium	Maturity
SGBFEB32IV	13%	Feb-32
SGBDE31III	12%	Dec-31
SGBJUN31I	11%	Jun-31
SGBDE30III	11%	Dec-30
SGBSEP31II	10.60%	Sep-31
SGBMAR30X	10.60%	Mar-30
SGBAUG30	10.20%	Aug-30
SGBMAR31IV	9.90%	Mar-31
SGBDC27VII	8.80%	Dec-27
SGBJAN27	8.50%	Jan-27

(Source: Value Research)

According to Value Research, this rise in SGB prices is partly due to the government’s delay in launching new tranches of SGBs.

The last batch was issued in February 2024, and there are reports suggesting that the government may discontinue the SGB scheme due to rising costs.

Originally, SGBs were considered a cost-effective way for the government to raise capital, with the expectation that gold’s historical returns of 7-8% would keep borrowing costs reasonable.

However, recent global economic trends have driven up gold prices, leading to higher-than-expected returns.

For example, the first SGB tranche, set to mature in November 2023, is delivering a return of 12.73%, much higher than anticipated.

In the past, many SGBs were available at a discount in the secondary market, making it an attractive opportunity for investors to buy at a lower price.

However, with current premiums soaring, Value Research advises caution, noting that purchasing SGBs at inflated prices could reduce future returns.

While SGBs remain one of the most tax-efficient gold investment options, Value Research also points out that gold investments typically yield single-digit returns in the long term, making them less ideal for investors seeking significant wealth accumulation.