Soaring gold prices put government in a pickle over upcoming bond payouts
Subscribe to enjoy similar stories. While equities have been sliding since late 2024, gold has been on a tear. The run-up in gold prices means the union government faces a much higher liability on payouts in its sovereign gold bond (SGB) scheme, which was introduced in 2015 and raised funds in 67 tranches.
SGBs have a tenure of eight years. They are issued and redeemed at the prevailing gold price and pay interest of 2.5-2.75% a year, which is taxed. But capital gains on redemption is tax-free.
Gold and equity prices had broadly been in sync since 2015. Until September 2024, equity prices, as measured by the Nifty 50 Total Share Index, had increased about 3.3 times since 2015. By comparison, gold delivered 3-fold returns.
But in the past few months, equity markets have fallen sharply while gold has continued to rise. Compared to their 2015 values, gold prices had cumulatively risen by 3.46 times by early March, against 2.85 times for equities. In general, returns on the various tranches of SGBs have compared well with Nifty 50 index returns.
The first eight SGB tranches trailed equity returns. But of the subsequent 28 tranches that have completed at least five years—the effective lock-in period of SGBs—as many as 23 have bettered equity returns in pre-tax terms. And since capital gains on SGBs are tax-free, this outperformance also extends to post-tax returns.
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