Investors cashing out India's Sovereign Gold Bond 2021-22 Series VII early on Nov. 2 received ₹14,167 a unit, the Reserve Bank of India said, close to three times the ₹4,761 a gram the tranche cost in October 2021. The same payout is about 11.5% lower than the ₹16,012 a unit that holders of an earlier tranche collected in May, a reminder that the government's gold bonds pass the full swing in bullion straight to savers.

For Indian households, and for nonresident Indians in Hong Kong, Singapore and the Gulf who bought the bonds before moving abroad, the early-exit windows now arriving each month are the main way to unlock gains before the bonds' eight-year maturity. The timing of those windows, not the investor's own choice, decides the price.

How the RBI sets the Sovereign Gold Bond price

The bonds track gold of 999 purity, with one unit equal to one gram. Under the scheme, the RBI allows premature redemption after the fifth year from issue, but only on an interest payment date. The price is the simple average of the closing gold price on the three business days before redemption, as published by the India Bullion and Jewellers Association (IBJA).

For Series VII, the central bank used the closing prices of Oct. 28, 29 and 30. Investors who applied online in 2021 received a ₹50 a gram discount, paying ₹4,711, according to the RBI's issue-price release. On those figures the gross gain is about 198% for offline buyers and about 201% for online buyers, before counting interest (Capital Times calculation).

The bonds also pay a fixed 2.5% a year on the amount first invested, credited every six months, according to the RBI's scheme FAQ. On a ₹4,761 issue price that works out to roughly ₹119 a unit a year.

Gold bond payouts have slipped since the spring

The rupee price of gold has eased through the autumn, and the redemption notices show it. Outlook Money reported that SGB 2020-21 Series VIII paid ₹16,012 a unit on May 18. In early September, the RBI set ₹15,384 a unit for Series VI of the same year. By late October the figures had dropped to ₹14,159 for 2020-21 Series I on Oct. 28 and ₹14,213 for 2019-20 Series VI on Oct. 30, before the ₹14,167 fixed for the Nov. 2 window.

That puts the latest payout about 7.9% below early September and 11.5% below May. The decline follows the slide in dollar gold prices, which hit a one-year low in late October after peaking in January.

Long-held tranches still show large gains because their issue prices were far lower. Outlook Money calculated that 2019-20 Series VI holders, who paid ₹3,835 a gram (₹3,785 online), made about 271% on the Oct. 30 payout. The newer tranches coming up for early exit were issued at higher prices, so their headline returns are smaller even when the redemption price is similar.

What holders should check before redeeming

Requests are not automatic. The RBI FAQ says investors must approach their bank, Stock Holding Corporation of India office, designated post office or agent before the coupon date, with the window opening 30 days ahead. Bonds held in demat form can instead be sold on stock exchanges at any time, though the price there can differ from the RBI's reference figure.

Tax treatment is a large part of the bonds' appeal. The RBI says capital gains arising when an individual redeems an SGB are exempt from tax, while the interest is taxed under the Income-tax Act. Outlook Money noted that bonds bought on the secondary market are not tax-exempt at maturity, so investors who acquired units on an exchange should check their position with a tax adviser.

The choice for holders is between locking in a known rupee figure now or waiting for a later window, or for maturity, and accepting whatever gold does in between. The redemption price only reflects three days of trading, so a sharp move just before a coupon date can change the payout by several hundred rupees a unit. Those who want to keep gold exposure after redeeming face the costs of other routes, which Capital Times compared in its guide to owning gold through bars, ETFs and bank accounts.

The RBI publishes each tranche's redemption price on the business day before its window, so holders of later 2020-21 and 2021-22 series can track the figure on the central bank's press release page as their coupon dates come round.

This article is general information, not financial advice.