Sovereign Gold Bonds (SGB), one of the popular gold investment tool, were debt securities issued by the Reserve Bank of India (RBI) on behalf of the government, with each unit representing a gram of gold. These bonds can be traded in the secondary market, allowing investors to potentially gain capital. Additionally, the government utilises SGBs to finance its fiscal deficit.
In a recent written reply to parliament, the government declared that the government would need to pay a total of Rs 67,322 crore to redeem all outstanding sovereign gold bonds (SGBs) as of April 1, 2025, based on the current gold price of Rs 9,284/gram.
This amount represents a 79% increase from the initial debt incurred when the bonds were issued, which totaled 130 tons of gold. It’s important to note that this figure does not account for any interest payments made on these bonds.
However, eminent investor Basant Maheshwari noted that if the government imposes 100% income tax on Sovereign Gold Bond, then this entire loss of Rs 1.20 lakh crore will be compensated and the government will not have to face the financial challenge.
SGB redemption
The government has fully redeemed bonds issued through seven tranches and has recently offered to prematurely redeem the eighth tranche. Sovereign Gold Bonds (SGBs) are redeemed based on prevailing gold prices, with the exact redemption prices determined by calculating the simple average of the closing gold prices for the week prior to redemption.
It is highly likely that this liability will increase significantly, as the final tranche of bonds is not set to be fully redeemed until 2032 and gold prices continue to rise steadily. Since the initial issuance of SGBs in 2015, gold prices have surged by over 252%.
SGBs and government’s plan
In 2015, the Indian government initiated the Sovereign Gold Bonds (SGBs) scheme with the aim of promoting an alternative form of gold investment and decreasing the nation’s reliance on imported precious metals. The program successfully encouraged individuals to consider investing in SGBs rather than traditional gold coins and jewelry. Despite these efforts, the overarching objective of reducing India’s gold imports was not met. As of the financial year 2023-24, nearly a decade later, India continued to be among the leading importers of gold globally, with inbound shipments totaling $49 billion, marking a 30% year-on-year increase.
The government initially offered investors a 2.75% annual interest rate, which was later decreased to 2.5% in an attempt to incentivize the purchase of bonds over physical gold. Despite the government’s efforts, individuals continued to invest in Sovereign Gold Bonds (SGB) while also purchasing gold jewellery and coins, resulting in an increase in gold imports rather than the desired decrease.
To date, the government has issued SGB totaling 147 tonnes of gold on 67 occasions. Currently, the government’s liabilities stand at 132 tonnes, amounting to Rs 1.2 trillion or $13 billion. These bonds are set to mature by 2032, posing significant financial pressure on the government in the upcoming years.
SGB taxation
SGBs enjoy exemption from capital gains tax when held until maturity (8 years). However, the interest earned is subject to taxation as “Income from Other Sources” at the investor’s relevant income tax slab rate. In the event of selling before maturity, capital gains tax will be applicable. Short-term gains will be taxed according to the investor’s income tax slab rate, while long-term gains will incur a tax rate of 12.5% without indexation benefits
Gold imports
Despite the implementation of the Sovereign Gold Bond (SGB) scheme, annual gold imports in India continued to hover around $37 billion. In 2022, the government raised the customs duty to 15%, resulting in higher gold prices and a rise in smuggling activities. Subsequently, in 2023, the duty was reduced to 6%, but the negative consequences of the earlier policy change had already taken their toll. The inconsistent and fluctuating policies had a detrimental impact on the effectiveness of the SGB scheme.
The Reserve Bank of India (RBI) currently holds 879 tonnes of gold, amounting to 11.5% of its total foreign exchange reserves, marking the highest level recorded. This indicates that both the government and RBI are facing financial strain, likely as a result of the SGB scheme.
For the financial year 2024-25, the government refrained from releasing any new tranches of SGBs. In the FY 2023-24, the government successfully generated Rs 270 billion from SGBs. However, it now appears that the government is unable to sustain the program due to mounting liabilities and financial challenges.