Guide
Sovereign Gold Bonds: the 2.5 percent coupon plus the gold price, over eight years
Many Indians buy gold as a store of value, but physical gold has making charges, storage risks and no income. The Sovereign Gold Bond was designed as a better way: a bond issued by the government and denominated in grams of gold. It pays interest on the amount invested, and at redemption it pays the market price of the gold. So you earn from two sources, a fixed coupon and the movement of the gold price. This calculator estimates both.
How a bond earns
The bond is bought at an issue price per gram, which is based on the average gold price at the time. Every six months the government pays interest of half of 2.5 percent of the issue price. After eight years the bond matures and is redeemed at the then price of gold for the number of grams you hold. It can be redeemed early, from the fifth year, on an interest payment date. The page asks for the grams, the issue price, the coupon, the years held and the growth rate of the gold price that you assume.
A worked example
The default is 100 grams at an issue price of 6,000 a gram, so 6,00,000 is invested, held for 8 years with gold rising 8% a year. The interest is 7,500 every six months, 1,20,000 over eight years, and 84,000 after 30% tax. The gold price at redemption is 11,106 a gram, so the 100 grams are redeemed for 11,10,558. Together with the after-tax interest you receive 11,94,558. The yearly return including the interest is 10.00% before tax, against 8.00% for the gold price alone. If gold stays flat, the redemption is 6,00,000, the total is 6,84,000 and the yearly return is 2.52%.
The yearly return
The yearly return is found by treating the purchase as an outflow and the 16 half-yearly interest payments and the redemption value as inflows, and solving for the rate that makes them balance, as in an internal rate of return. Because the interest is a stable stream, the return sits above the growth rate of gold in rising markets (by about two percentage points in the sample) and close to 2.5 percent in flat ones. It is a pre-tax figure that treats the interest as received twice a year.
Tax
The interest is taxable at your slab rate each year. When the bond is held to maturity, the capital gain on redemption is exempt from tax for an individual under the rules at the time of writing. If you sell on the stock exchange before maturity, the gain is taxable. The page applies the tax rate you enter to the interest only and treats the redemption as tax-free, which matches holding to maturity.
Why not just buy gold?
A physical purchase involves a making charge and storage costs, and sells at a discount, whereas the bond has no such costs and pays interest on top. The disadvantages are the long period and the fact that exit before maturity depends on the exchange, where the bond may trade at a discount. The gold calculator shows the cost side of buying jewellery, and the page here shows the return side of a bond.
Edge cases
The years held can be up to 8. A growth rate can be negative to model a fall in the gold price. An interest rate of zero gives only the gold return. A tax rate of zero shows interest before tax.
Limits
New tranches have not always been available, so check whether any are open and whether the bonds exist in the secondary market. The page does not model the discount or premium at which a bond trades or the cost of buying on an exchange. The gold price is an assumption and the result is not a forecast.
Related tools
- Gold Price Calculator prices physical jewellery with making charges and tax.
- Gold Loan Calculator shows what lenders would advance against gold.
- CAGR Calculator finds the growth rate of any price between two dates.
- FD Calculator gives a fixed-rate alternative to compare with the bond.
Checked against the current version of the Sovereign Gold Bond Calculator on .