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Impact of Budget 2024 on Sovereign Gold Bond (SGB) Investors: What You Need to Know

SGB Investors Disappointed by Budget 2024 Customs Duty Changes

Many Sovereign Gold Bond (SGB) investors, particularly those whose investments matured on August 5, 2024, were left disappointed by the Budget 2024 announcement regarding customs duty on gold. The government reduced the customs duty on gold from 15% to 6%, leading to a drop in gold prices. This decline was influenced by both the reduction in domestic customs duty and global market factors. The key question is: Are SGB investors facing significant losses due to this price drop? Some investors have voiced their concerns on social media, suggesting that the government may have benefited from this decision.

Analyzing the Government’s Gains and Losses

The government might benefit in two ways: first, by paying out less on SGB redemptions due to lower gold prices, and second, by losing revenue due to the reduced duty on imported gold. Although the government could save money on SGB redemptions, the loss in potential revenue from the higher customs duty on gold could be more significant.

How Gold Price Drop Affected SGB 2016-17 Series I Investors

For investors in the SGB 2016-17 Series I, the final redemption price was set at Rs 6,958 per unit, with the redemption date being August 5, 2024. According to the India Bullion & Jewellers Association (IBJA), the gold price dropped from Rs 72,60.9 per gram on July 23, 2024, to Rs 69,699 per gram on August 5, 2024, and further to Rs 68,904 per gram on August 6, 2024. The price fall resulted in an absolute loss of Rs 302.9 per gram or 4.17%.

Abhishek Gupta, Founder and Managing Partner at Pierag Consulting LLP, noted that the reduction in customs duty might impact SGB returns due to the dip in gold prices. However, he believes this could be offset by a potential rise in gold prices driven by higher domestic demand during festive seasons and other global factors. While there may be short-term losses, the long-term outlook remains positive.

Rising Gold Prices: A Silver Lining?

As investors wait for their maturity amounts, both domestic and international gold prices are on the rise due to economic events and global geopolitical uncertainties. On August 6, 2024, the IBJA reported the domestic price of 999-purity gold as Rs 68,904 per gram. Internationally, gold prices also increased, with spot gold up 0.2% to $2,411.97 per ounce, and U.S. gold futures up 0.3% to $2,452.60.

Government’s Gains and Losses from Customs Duty Reduction

The government issues SGBs, which are repayable after eight years, and the redemption price is based on the average gold price of the last three business days as per IBJA. Experts suggest that while the government may save a small amount on SGB redemptions, it could face significant revenue losses from lower taxes on gold imports. According to Aksha Kamboj, VP of the India Bullion & Jewellers Association, the customs duty cut might lead to a revenue loss of around Rs 26,000 crore, though this could be offset by increased gold imports through official channels. The government might benefit by Rs 620 crore in FY 2024-2025 from SGB redemptions, with nearly 10 tons of gold bonds maturing that year.

Did the Government Cut Customs Duty to Target SGB Investors?

There has been speculation on social media that the government reduced customs duty to cut down on SGB redemption costs. However, this seems unlikely. As Kamboj pointed out, no government would deliberately lose Rs 26,000 crore in potential revenue just to save Rs 620 crore.

Sachin Kothari, Director of Augmont – Gold for All, explained that the SGB scheme, launched in November 2015, aimed to offer a safe alternative to physical gold. Over the years, as gold prices rose, the SGB scheme became an expensive borrowing tool for the government, raising redemption liabilities. Kothari noted that if the customs duty hadn’t been cut, gold prices might have been around Rs 7600/gram, resulting in a government outflow of nearly Rs 2090.65 crore. However, he emphasized that the main reason for reducing customs duty was to create a balanced and transparent market that curbs illegal gold imports and supports industry growth.

Considering the expected net loss from the customs duty reduction, it doesn’t seem that the government intended for SGB investors to suffer losses upon redemption.

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