How is SGB calculated?

Sovereign Gold Bonds (SGBs) are financial instruments that allow investors to gain exposure to gold price movements while also earning a fixed interest. The returns on SGBs are calculated by combining two primary components: fixed interest income and capital appreciation linked to the market price of gold.

The Two Pillars of SGB Returns Calculation

The calculation of SGB returns is straightforward, designed to provide investors with both a steady income and the benefit of rising gold prices. This dual benefit makes SGBs an attractive alternative to holding physical gold.

1. Fixed Interest Income

SGBs offer a guaranteed fixed interest rate, typically 2.50% per annum, which is paid semi-annually. This interest is calculated on the initial issue price of the bond.

• How it's calculated: The annual interest amount is a percentage of the initial investment value (based on the issue price per gram of gold). This amount is then divided into two equal payments made every six months.
• Example: If you invest in an SGB at an issue price of ₹6,000 per gram for 10 grams, your initial investment is ₹60,000.
  • Annual interest: 2.50% of ₹60,000 = ₹1,500
  • Semi-annual interest payment: ₹750

2. Capital Appreciation Based on Gold Price Movement

This component reflects the change in the market value of gold over the bond's tenure. The bond's face value is directly linked to the gold price, so if gold prices rise, the bond's value increases, leading to capital appreciation.

• How it's calculated:
  • Issue Price: The price at which SGBs are issued is determined by the simple average of the closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Ltd (IBJA) for the last three working days of the week preceding the subscription period.
  • Redemption Price: Upon maturity (typically 8 years), the redemption price is similarly calculated based on the simple average of the closing price of gold of 999 purity published by IBJA for the last three working days of the week preceding the date of redemption.
  • The difference between the redemption price and the issue price per gram constitutes the capital appreciation.
• Example:
  • You purchased an SGB at an issue price of ₹6,000 per gram.
  • After 8 years, the average gold price at redemption is ₹8,000 per gram.
  • Capital appreciation per gram: ₹8,000 - ₹6,000 = ₹2,000
  • For 10 grams, total capital appreciation: ₹20,000

Understanding Gold Price Linkage for SGBs

The Reserve Bank of India (RBI) issues SGBs on behalf of the Government of India. The pricing mechanism ensures that the bonds accurately reflect the market value of gold at both the time of subscription and redemption. This direct linkage to 999 purity gold prices from a recognized industry body like IBJA provides transparency and builds investor confidence. Investors essentially buy gold in dematerialized form without the need for physical storage.

Key Features Enhancing SGB Value

Beyond the direct calculation of returns, several features make SGBs a compelling investment in gold:

Tax Benefits

One of the most significant advantages of SGBs is their favorable tax treatment, especially for individual investors.

• Interest Income: The semi-annual interest received is taxable as per the investor's income tax slab. Tax Deducted at Source (TDS) is not applicable on SGBs, but investors are responsible for declaring the interest income in their tax returns.
• Capital Gains at Maturity: For individual investors, capital gains arising from the redemption of SGBs at maturity are exempt from income tax. This makes SGBs highly tax-efficient for long-term gold investments.
• Capital Gains on Premature Exit: If SGBs are sold on a stock exchange before maturity, or if premature redemption (after 5 years) is opted, capital gains would be taxable according to standard income tax rules (long-term or short-term capital gains, depending on the holding period).

Liquidity and Trading

SGBs offer a degree of liquidity, allowing investors to exit their investment before the 8-year maturity period.

• Stock Exchange Listing: SGBs are listed on stock exchanges (like NSE and BSE) within a fortnight of their issuance, allowing investors to trade them in the secondary market.
• Premature Redemption: Investors have the option to prematurely redeem their SGBs after the fifth year from the date of issue, on the interest payment dates.

Safety and Purity Assurance

Investing in SGBs eliminates many concerns associated with physical gold.

• Government Backing: Being sovereign bonds, SGBs are backed by the full faith and credit of the Government of India, making them a very safe investment.
• No Storage Issues: Investors avoid the costs, risks, and hassle of storing physical gold, such as locker charges or theft.
• Guaranteed Purity: SGBs are issued in denominations of grams of gold of 999 purity, eliminating concerns about the purity of the metal.

For more detailed information, you can refer to the RBI's Frequently Asked Questions on Sovereign Gold Bonds.

SGBs vs. Physical Gold: A Comparison

Understanding the differences between SGBs and physical gold can highlight why SGBs are often considered a superior investment option for those seeking gold exposure.

Feature	Physical Gold (e.g., jewellery, coins)	Sovereign Gold Bonds (SGBs)
Form	Tangible asset	Dematerialized, government security
Purity Assurance	Varies, depends on seller	Guaranteed (999 purity)
Storage & Security	Requires physical storage, risk of theft	No physical storage, held in demat or paper form
Additional Income	None	Fixed interest (e.g., 2.50% p.a.) paid semi-annually
Making Charges	Applicable (especially on jewellery)	Not applicable
GST	Applicable on purchase and making charges	Only on the bond's value, if applicable (usually exempt)
Capital Gains Tax	Taxable as per holding period	Exempt for individuals at maturity; taxable if sold early
Liquidity	Can be sold to jewellers/dealers	Traded on exchanges; premature redemption after 5 years

Practical Example of SGB Return Calculation

Let's consider an investment scenario to illustrate how total returns are calculated.

Scenario: An investor purchases 10 grams of SGB during an issuance tranche.

• Issue Price: ₹6,000 per gram
• Total Investment: ₹60,000 (10 grams * ₹6,000/gram)
• Interest Rate: 2.50% per annum
• Tenure: 8 years

Calculation:

1. Total Interest Earned:

   • Annual Interest: ₹60,000 * 2.50% = ₹1,500
   • Total Interest over 8 years: ₹1,500 * 8 = ₹12,000

2. Capital Appreciation (at Maturity):

   • Assume the average gold price at the time of redemption (after 8 years) is ₹8,500 per gram.
   • Redemption Value: 10 grams * ₹8,500/gram = ₹85,000
   • Capital Appreciation: ₹85,000 (Redemption Value) - ₹60,000 (Initial Investment) = ₹25,000

3. Total Return:

   • Total Return = Total Interest Earned + Capital Appreciation
   • Total Return = ₹12,000 + ₹25,000 = ₹37,000

In this example, the investor earns a total return of ₹37,000 on an initial investment of ₹60,000, along with the benefit of tax-free capital gains at maturity.