Gold customs duty cut to lower Govt outgo on sovereign bond redemptions

The proposal to reduce Customs duty on gold in the Budget may have been prompted by the twin objective of lessening the outgo due to redemption of sovereign gold bonds (SGBs) and making fresh investment in these bonds more attractive, say experts.

A cut in Customs duty reduces the price of the yellow metal. As a result, when the Government redeems SGBs, it has to pay relatively less as redemption price to investors.

Also, fresh SGB issuances will become attractive as investors will have to invest less to buy a SGB. The Budget has proposed a cut in Customs duty on gold from 15 per cent to 6 per cent.

The SGB scheme was floated in 2015 specifically to reduce the demand for physical gold and shift a part of the domestic savings used for purchase of gold, into financial savings. Also, foreign exchange outflow comes down when demand for physical gold declines. The Government has collected ₹72,274 crore via issuance of SGBs since 2015.

Banking expert V Viswanathan, said: “The price of gold per gram in 2015, 2016, 2017 ranged between ₹3,100 and ₹3,500. Its pre-Budget level was ₹7,200 per gram. That means SGBs, which are classified as Government Securities and represent borrowings by the government, will cost the exchequer a lot when they are redeemed.

“So, in order to cut down the outgo, the government may have reduced the Customs duty on gold. The per gram price of gold (24 carrot) is now down...So, on redemption of SGBs, the government will pay less, if the same trend continues.”

On maturity, SGBs are redeemed in rupees and the redemption price is based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewellers Association Ltd. 

Prithviraj Kothari, Managing Director of RiddiSiddhi Bullions, observed that most of the jewellers and wholesalers are out of stock after the gold prices plunged almost 10 per cent from ₹74,000 per 10 gm to ₹67,000 last week due to import duty cut and weakness in the international prices.

Consumers have taken full advantage of the fall in prices, with a few investors buying gold bars for investment, he said.

Prices of SGBs issued 8 years ago have more than doubled. SGB scheme 2016-17 -Series-I issued in August 2016 will be redeemed next month. It was issued at ₹3,119 per gram with an annual interest rate of 2.75 per cent.

Redemption prices for the aforementioned tranche may be declared above Rs 6,800 per gram, delivering a return of almost 140 per cent in the last eight years.

RBI has not issued a SGB since February 2024 and the next issue, which is expected in a few days, will see good buying interest, Kothari said.

The Government plans to raise ₹18,500 crore via SGBs in FY25, about 31 per cent less vis-a-vis ₹26,852 crore it actually raised in FY24. However, SGBs redemption is higher at ₹3,500 crore in FY25 against ₹1,500 crore in FY24.