Sovereign Gold Bond Scheme (SGB)

Overview

The Sovereign Gold Bond Scheme (SGB) was launched by the Government of India in November 2015 as a part of its Gold Monetisation Strategy. SGBs are government securities denominated in grams of gold, issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They were designed as an alternative to holding physical gold, aiming to reduce the demand for physical gold and thereby curb gold imports that weigh on the current account deficit.

However, the Government discontinued new issuances of SGBs from FY 2025-26 onwards. Finance Minister Nirmala Sitharaman confirmed during the post-budget briefing for the Union Budget 2025 that no new tranches would be issued. The last series issued was in February 2024. Existing bonds remain valid and will continue to accrue interest and mature as per original terms.

Key Features

Eligibility and Investment

• Eligible Investors: Residents of India under FEMA 1999 — individuals, Hindu Undivided Families (HUFs), trusts, universities, and charitable institutions.
• Minimum Investment: 1 gram of gold.
• Maximum Investment: 4 kg per financial year for individuals and HUFs; 20 kg for trusts and entities notified by the government.
• KYC Documents: Same as those required for purchase of physical gold (PAN is mandatory for amounts exceeding Rs 50,000).

Interest and Redemption

• Interest: 2.50% per annum on the initial investment amount, paid semi-annually. The last instalment is payable on maturity along with the principal.
• Maturity: 8 years from the date of issue.
• Premature Redemption: Allowed after the 5th year on interest payment dates. The redemption price is based on the simple average of the closing gold price of the previous three business days.
• Tradability: SGBs are tradable on stock exchanges (NSE and BSE) within a fortnight of issuance.

Authorised Channels

SGBs were sold through Scheduled Commercial Banks (except Small Finance Banks, Payment Banks, and Regional Rural Banks), Stock Holding Corporation of India Limited (SHCIL), designated Post Offices, and recognised stock exchanges (NSE and BSE).

Tax Treatment

• Interest Income: Taxable as per the income tax slab of the investor.
• Capital Gains on Maturity: Fully exempt from capital gains tax for individual investors who subscribed directly from RBI.
• Capital Gains on Transfer: If sold before maturity through stock exchange or transfer, long-term capital gains (after 12 months) are taxed at 12.5% (effective from Budget 2024 amendments). Indexation benefit is available.
• Budget 2026 Change: From April 1, 2026, the capital gains tax exemption at redemption applies only to individuals who subscribed directly from RBI. Secondary market purchasers will not get tax-free redemption gains.

Reasons for Discontinuation

Economic Affairs Secretary Ajay Seth stated that SGBs turned out to be a high-cost method of borrowing for the government compared to traditional bonds. The scheme failed to achieve its primary objective of reducing gold imports, as physical gold demand remained strong. Key factors:

• Rising Gold Prices: Gold price rose from Rs 26,300 per 10 grams (2015) to approximately Rs 84,450 per 10 grams (March 2025), dramatically increasing the government’s redemption liability.
• Outstanding Liability: With investors holding approximately 132 tonnes of gold in SGBs, the government’s estimated liability stood at approximately Rs 1.12 lakh crore.
• Counted as Fiscal Deficit: SGB redemptions are counted as part of the fiscal deficit, adding fiscal pressure.
• No Import Reduction: Gold imports did not decline as anticipated, negating the original rationale.

Latest Developments

• February 2025: Government confirms no new SGB issuances from FY 2025-26 onwards; existing bonds continue till maturity.
• Budget 2026: Tax exemption on capital gains at redemption restricted to direct subscribers; secondary market purchasers excluded from April 1, 2026.
• Ongoing Redemptions: RBI continues to process premature and scheduled redemptions. SGB 2017-18 Series III due for final redemption on October 16, 2026 at Rs 12,567 per unit.
• Secondary Market Trading: SGBs continue to trade on NSE and BSE, often at a premium to issue price due to gold price appreciation.

Prelims Importance

• SGBs are issued by RBI on behalf of the Government of India (not by RBI itself).
• Denomination: grams of gold. Minimum 1 gram, maximum 4 kg/year (individuals).
• Interest: 2.50% per annum, fixed, paid semi-annually.
• Tenure: 8 years; premature exit from 5th year.
• SGB redemptions are counted as part of fiscal deficit.
• Capital gains on maturity are exempt for individuals (direct subscribers only, post-April 2026).
• Scheme launched in 2015 as part of Gold Monetisation Strategy.
• Discontinued from FY 2025-26 — no new issuances.
• Outstanding SGB liability: approximately Rs 1.12 lakh crore (132 tonnes of gold equivalent).

Mains & Interview Importance

GS3 — Indian Economy: Mobilisation of Resources; Government Budgeting

• Analyse why SGBs failed to reduce India’s gold imports despite being a demand-side intervention. Discuss the structural and cultural factors driving physical gold demand.
• Evaluate the fiscal implications of SGBs — how a scheme designed to reduce CAD ended up inflating the fiscal deficit liability due to gold price appreciation.
• Compare SGBs with other gold monetisation instruments (Gold Monetisation Scheme, Gold ETFs) in terms of investor uptake and policy effectiveness.

Interview Angle: “The SGB scheme aimed to wean Indians off physical gold but ended up creating a Rs 1 lakh crore fiscal liability. Was this a policy design failure, or did external factors (gold price surge) make the outcome unavoidable?”