The tranche was issued at ₹3,499 per gram. Investors who bought the bonds online and paid digitally received a ₹50 discount, bringing their effective cost to ₹3,449 per gram. Against this, the government has fixed the premature redemption price at ₹15,310 per unit.
For an investor who paid the discounted issue price, the capital gain works out to ₹11,861 per unit, or about 344%. For investors who paid the regular issue price of ₹3,499, the gain is ₹11,811 per unit, or about 338%.
This calculation only captures the increase in the bond’s redemption value. SGB investors also receive 2.5% annual interest, paid semi-annually, on the original issue price. Over the five-year period, this interest adds to the overall return.
How is the SGB redemption price calculated?
The ₹15,310 redemption price is not based on the original issue price or the gold price on August 14.
For premature redemption, the price is calculated using the simple average of the closing price of 999-purity gold for the three business days preceding the redemption date, as published by the India Bullion and Jewellers Association (IBJA).
For the August 14 redemption, the calculation is based on gold’s closing prices on August 11, 12 and 13, 2026.
Who can redeem the SGB now?
SGBs normally have an eight-year maturity. However, investors can seek premature redemption after the completion of five years from the date of issue, subject to the redemption falling on an interest payment date.
The SGB 2019-20 Series III was issued on August 14, 2019, making August 14, 2026 its eligible premature redemption date.
Investors do not have to redeem the bonds merely because they have completed five years. They can continue holding them until the scheduled maturity, subject to the terms of the scheme.
What about the interest?
The SGB pays 2.5% interest per year on the initial investment, with payments made every six months. Importantly, this interest is calculated on the original issue price and not on the current market value or redemption price of the bond.
Therefore, an investor’s overall return from the SGB would comprise both the capital appreciation linked to gold prices and the interest received during the holding period.
What investors should keep in mind
The ₹15,310 figure is the premature redemption price per unit, with one SGB unit representing one gram of gold. The actual amount received will depend on the number of units held.
The gain of 338%-344% mentioned above is a simple comparison of the issue price with the redemption price. It does not represent the annualised return and does not include the interest received over the five-year holding period.
For investors deciding whether to redeem, the relevant comparison is not just the gain already made but also their investment horizon, prevailing gold prices and the alternative options available for holding gold.
