SGB: To subscribe or buy in the secondary market?

The Reserve Bank of India (RBI) has recently launched the third series of Sovereign Gold Bonds (SGBs) 2023-24. This latest series is open for subscription until December 22, 2023. The bonds are priced at Rs 6,199 per gram of gold, but an instant discount of Rs 50 per gram is offered to those who apply online and pay through digital channels.

Who should subscribe?
Gold is appealing due to its tangible nature. It also has a traditional, cultural and historical value attached to it. That said, we, at Value Research, have never been a big advocate of investing in the yellow metal as it is not a wealth-generating asset.

Gold has delivered only an 8 per cent return in the last decade, reinforcing its status as a not-so-good investment . However, it may shine during equity market crashes. Hence, sovereign gold bonds can be the best bet for those looking to protect their investments during such downturns.

Choosing between new or existing SGBs: Which option is right for you?
Now, when it comes to investing in SGBs, our readers often inquire about the best approach. Should they subscribe to newly issued SGBs or buy those already available in the secondary market? Let's explore.

Existing SGBs already trading in the secondary market may be available at a discounted price. Since SGBs have an eight-year holding period and there are few buyers in the market, sellers may be forced to offer their investment at a lower price.

Therefore, buying SGB from the secondary market may be a better idea.

The current SGB prices are a testament to that. While the third series of Sovereign Gold Bonds (SGBs) 2023-24 are available at Rs 6,199 per gram of gold, you'd find bonds maturing around 2030-31 available at a lower price (see the below table). In some cases, you can buy the gold bond for as little as Rs 6,114 per gram!

Historically, SGB discounts were even more attractive. For instance, this year, previous SGB issues saw discounts of up to 6 per cent.

Liquidity issues
You can laugh all the way to the bank for buying an SGB at a discount from the secondary market. But beware, the tables can turn if you try to sell it before maturity.

For instance, the 2022-23 Series II tranche, shown in the above table, available at a 1.4 per cent discount, has a low trading volume of only Rs 4 lakh. So, finding a buyer might be challenging and you have to sell your SGB at a lower price.

Taxation
If you hold the SGB till maturity, the capital gains are exempt from taxation.

However, if you choose to sell the bonds within one year, any gains will be added to your annual income and taxed according to your applicable income tax slab. If you sell the SGB after one year, capital gains will be taxed at 20 per cent after accounting for indexation benefits.

Our word
Consider buying SGBs in the secondary market if they are available at a discounted price. Holding them until maturity can also help you save on taxes.

However, when a new SGB is issued, compare its price to existing SGBs with similar maturity in the secondary market. If the new issue is priced lower, consider subscribing to it.

Also read: How to invest in SGBs?