Investors who have bought the first issue of sovereign gold bonds, up for premature redemption next month, are sitting on a gold mine.
When launched in November 2015, the price of gold was ₹2,684 per gram. The current price is almost double at ₹5,135 per gram, according to the India Bullion and Jewellers Association (IBJA).
Those holding them in a physical form or those who have bought them online and want to redeem these bonds before maturity will be able to do so now.
The redemption price will be based on the simple average of the previous week’s closing gold price of 999 purity published by the IBJA.
At the current price, those who invested in the first issue are looking at an absolute gain of over 90% and an annualized gain of around 14% per annum over five years.
That’s not all. Over and above the capital gains, investors have earned an interest of 2.75% per annum—that’s ₹13,750 on gold bonds worth ₹1 lakh over five years.
As these bonds are listed on stock exchanges, there is the option to buy and sell them anytime. However, one needs to have a demat account to sell these bonds on the exchange.
Experts believe the bull run in gold prices that started in July 2019 is likely to continue.
“Over the last couple of years, we have seen an upside of over 60% on gold. We continue to believe that the next couple of years are going to be very interesting for gold bulls, and the larger bias is likely to be on the upside. Although we are over with half the rally, the other half is likely to unfold soon,” said Navneet Damani, vice president, commodities research, Motilal Oswal Financial Services Ltd.
“Going into 2021, the price is expected to extend its bullishness by another 25% to test a fresh all-time high level of $2,500 (per ounce). On the domestic front, the same trend is likely to persist in 2021 wherein the price is likely to extend gains and test ₹68,000 (per 10 gm as well,” he said.
Experts are advising people to invest in gold for portfolio diversification, but not more than 10-15% of their overall investments.
“Booking a partial profit is not a bad idea after considering the tax implications. I don’t recommend more than 10% of the portfolio in gold,” said Melvin Joseph, investment adviser and founder of Finvin Financial Planners.
If investors redeem the bonds now, they will have to pay capital gains tax while there will be no capital gains tax if they hold on till maturity—that is eight years.
Long-term capital gains tax at the rate of 20% with indexation is applicable in case these bonds are sold after three years, but before eight years. The interest on these bonds is also fully taxable and is added to the income of the investor.
People planning to redeem gold bonds would need to request the bank or post office where they bought the bonds.
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