InvestorQ : What are the return and tax implications of opting for the RBI early redemption window for gold bonds? Do you suggest me to go for the early redemption window?
sara Kunju made post

What are the return and tax implications of opting for the RBI early redemption window for gold bonds? Do you suggest me to go for the early redemption window?

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Mary Joseph answered.
2 weeks ago
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With the RBI window for early redemption opening, here is what you need to know.

· Under the gold bonds agreement, the government will be offering an early redemption on these bonds. This window after 5 years at 6-month intervals, has already started.

· At this point, the returns are looking great on paper. For example, the Nov-15 tranche of gold bonds is being offered redemption at Rs.4,837/gram, a capital gain of 80%.

· To put things in perspective, this gain is over 5½ years which is a CAGR of 12.5% per year including the 2.75% interest earned? How does that benchmark with Nifty?

· Nifty gave 13.5% CAGR in the same period without dividends and 15% with dividends. Just to confirm, the Nippon Nifty ETF gave 14.85% CAGR return in this period.

· The capital gains will only be exempt if held for the full tenure of 8 years. In case of early redemption long-term capital gains will be taxed at 20% with indexation.

· However, if you opt for the early redemption window, post tax returns will still be an attractive 11.3%, and there is no assurance that redemption will be better.

· The decision on redemption should be taken based on your asset allocation, and not on just returns, taxation etc. Keep 10-15% gold allocation in your portfolio as benchmark.

· Moral of the story; redemption window is a good idea if the gold allocation principle has been violated. Otherwise, you can hold on.

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