Hey Traders and Team Zerodha.
I called up your customer care, but the person did not have accurate knowledge about this.
I am worried about my SGBs, as they will be taxed on maturity (since I bought them from the exchange).
I hold SGBSEP28VI and SGBAUG28V bonds that mature in SEP-28 and AUG-28 respectively. Coupon date falls on 10th March and 10th February.
I know that these bonds qualify for early redemption from RBI (after 5 years from issue date- 2020-21 series).
I also know that, earlier redemption through RBI did not qualify for LTCG Tax- At maturity or Early.
Query 1. Post budget, will I have to pay LTCG if I apply for early redemption, as it will be done before April 2026. (new tax rule applies after 31st March, 2026)
Query 2. When does the actual early redemption take place. Coupon date or on the date Zerodha processes the redemption. Is there a fix date from the RBI’s end?
Query 3. Is it possible to know the price at which it will be redeemed?
I plan to book my profits in these old series (tax free) and buy the new series near the price at which these old SGBs will be redeemed.
Early response will be really appreciated, as there is not much time for me to place the redemption request.
Answer to Query 1: SGBs can be redeemed through the RBI’s premature redemption window after completion of five years, and the capital gains exemption will apply if the redemption is completed before April 2026.
Answer to Query 2 : The actual redemption occurs on the specific date notified by the RBI for the respective tranche, and not on the date when the broker processes or forwards the redemption request.
Answer to Query 3 : The redemption price cannot be known in advance, as it is determined by the RBI based on the average closing price of gold (999 purity) for the three business days immediately preceding the redemption date.
Presumably plenty of folks who would have purchased SGBs from the secondary market,
and wish to have long-term exposure to gold (via SGBs)
would prefer to follow this approach to book few gains in SGBs right way due to the tax-advantage.
Do you foresee plenty of demand (premium higher prices) for the pending SGB series in the near future when you plan to buy them?
Hereafter, The only advantage being lack of expense ratio and tracking errors - along with a small interest and compared to ETFs, risk being government default by either being unable to pay or modifying tax laws to make bonds even more worthless, as it did recently.
I am lucky somewhat that my bonds are eligible for early redemption just before the new tax law applies. So I plan to book my gains tax free till now and then purchase new bonds at current price and will be taxed accordingly.
I don’t think so. The new law has made the SGBs less attractive. So i think that the liquidity will become even more scarce. I don’t see people lining up to buy this product, Who knows, they might bring in an update next year to tax them at slab rates…I think they will be available at discounts or at fair values from now on.
Not sure if i got my point across,
In case i didn’t, here’s attempt no.2 -
Right. That’s today.
Right. But, so is every other person that held SGB of such series/tranches.
While many (most?) of them would choose to redeem their SGB within the imminent deadline,
a fraction (most?) of them would be doing so despite wanting continued exposure to Gold (via SGB?).
They will still be redeeming their SGBs (just like you are)
with the hopes of booking gains under the existing tax-favorable terms,
only to reinvest the proceeds back into SGB in the near future albeit not on tax-favorable terms. (but still better than other alternatives, in their value model.)
Explored purchasing them now instead of waiting?
Of course, this will require additional funds/liquidity in the short term
until you receive the funds from redeeming your SGB in the upcoming weeks.
Worth it? Likely depends on each individual’s circumstances.
Nope! Not at the same cost and certainly not without paying the risk premium attached (Volatility). Let me show the maths assuming today is the premature redemption date and we shall consider last 3 days IBJA PM prices for reference -
Given (3-day IBJA PM prices)
Day -1: ₹1,51,529
Day -2: ₹1,48,746
Day -3: ₹1,65,795
3-day average IBJA (per 10g)
(151,529+148,746+165,795)/3=155,356.67
Per SGB unit (1 gram):
₹15,535.67
Other Inputs (unchanged)
SGB 2032 FEB IV market price (close) = ₹18,444
Units held = 100 (SGB 2020-21 Series VI)
Step 1: Cash received at maturity (IBJA avg)
100×15,535.67=₹15,53,567
Step 2: Units you can re-buy (2032 FEB IV)
15,53,567/18,444=84.22 units
Step 3: Unit loss
Units lost=100−84.22=15.78
Unit loss %=15.78%
Bottomline
If you recall the SGB premium was almost 30% for FEB 32 IV and Budget made it less attractive by 12.5%. So,
15.78% + 12.5% = 28.28% (approx ~ 30%) - So the math checks out.
It also means that the market is still pricing a premium. And one needs to understand that SGB price premium is a perceived function of -
International gold price (Direct)
USD/Rupee Depreciation Hedge (Indirect)
Pending Interest Payout 2.5% (Direct)
Attractiveness compared to ETFs, Physical, etc. (Indirect)
Ongoing redemption window pressure (Indirect)
Future possibility of similar breach of trust (Indirect)
Collateral Advantage (Indirect)
Demand / Supply (Direct)
You can do iterations to this with different SGBs but the fact remains - if there is a perceived advantage - market is already pricing it in and more likely than not - one is not accounting for that perceived risk.
FEB32 has always been a outlier, because it was the last issued. Sorting by discount to fair value here, https://sgb.vercel.app/ The premium is only around 1% for most long dated SGBs and most short dated SGBs are trading at a discount of 5%. Only the last one has 8%.It was 30% before gold crash/budget yes.
Then they probably were trading at 13.5% premium before Budget and the one you buy will face the same discount as the short dated SGBs while approaching maturity. Exactly my point.
Anyhow, there are just too many variables and there is a perceived risk part to it. So this one is truly - each one for himself kind of situation. But its sad because most of the SGB investors must be in for long term (they certainly held it for 5 years if they are considering early redemption) and have to do it in 1-2 months time hurriedly.
I don’t disagree that there’s a cost to this exercise. Just that the quantum of cost is significantly less than your estimate. It’ll be along the lines of tracking error of gold ETFs. Currently, market seems to be pricing in a discount as well in expectation for much lower gold rates in the short term. If someone’s view is opposite and they’re right, they do stand to gain significantly. The main risk isn’t quantity, but the gold price crash. To redeem, he needs to send request before 10 days to zerodha and only 3 day prices are considered. Those 3 day prices maybe a dip and he might get much lower prices with which he may not be able to buy equivalent units. Gold may also continue to crash making the entire exercise pointless.
Hmm. Then you redeem and not buy at all. I agree - in that case you are getting a nice tax free exit.
But most would like to do the following - considering there are 3 more years of Trump (Gold hedge against chaos, Declining dollar and Global Reserve Bank accumulation)
On this point -
This is the 10 days range for SGB 32 IV ~ 42%. Volatility = Risk and one may fall on either side of this trade. Its very difficult for a long term SGB holder to take this call and get it right.
Sure, That demand will come in, which is likely to increase the liquidity. But I think it will come around 5-7th March (near the redemption date), to get same/similar price.
In order to do this and get similar prices, it will require additional funds, as you mention.
Even if you have to arrange funds from somewhere, you will need them for 4-5 days max. After getting the proceeds from your old bonds, you can return them reasily.
I myself plan to buy on 4th or 5th March. I have the funds arranged already.
