​Tax free premature redemption of Sovereign Gold Bond (SGB) is allowed only within this 21-day annual window (2024)

If a retail individual investor wants to encash their Sovereign Gold Bond (SGB) investment prematurely and not pay any income tax on the capital gains, then the way to do so is to apply for premature redemption with the RBI. However, this premature redemption window opens typically for 21 days and only after a specified interval.

The RBI opens the SGB buyback window every year starting from the fifth year of the said SGB tranche. "Though the tenor of the bond is 8 years, early encashment/redemption of the bond is allowed after the fifth year from the date of issue on coupon payment dates," said the RBI in a frequently asked question (FAQ) about SGB on its website.

Also read: When is the last date to invest in Sovereign Gold Bonds 2023-24 - Series IV

What is the deadline to tender SGBs for premature redemption by the RBI

There is a specific annual deadline within which an SGB investor must apply for premature redemption after the completion of 5 years of investment. If the SGB is not tendered to the RBI within this deadline then the said SGB cannot be redeemed in the relevant year. An investor will then need to wait for the next time until the premature redemption window opens for that particular SGB.

According to an FAQ on SGBs by the RBI, "In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date."

According to Mukesh Chand, Senior Counsel, Economic Laws practice, "Requests for premature redemption must be exercised by the investor within a specific time frame. SGB Investors must inform the concerned Receiving Office or Bank/SHCIL/Post Office prior to the 29th day of the Coupon Date."

Chand explains the time frame concept of premature redemption of SGB with an example. He says, "If an investor has invested in SGB 2018-19 Series V Tranche which was issued on 22nd January 2019 for which interest payment date was 22nd January 2024, for this the date for submitting the request for premature redemption of the SGB was between December 22, 2023, to January 12, 2024."

Another instance can be taken for SGB Series VI which was issued on February 12, 2019, the interest payment would be February 12, 2024. For tendering this particular SGB for premature redemption, the investor must submit the request between January 12, 2024 and February 2, 2024. "For SGB investors the dates as notified by RBI for exercising options are critical," says Chand.

Rajiv Sharma, Partner, Singhania & Co, a law firm, agrees with Chand's viewpoint and adds that SGB investors will be provided with a premature redemption window starting from the fifth year of the bond, around the time of the interest payment date.

"The premature redemption window opens thirty days before the interest payment date and closes one day before the respective interest payment date. Investors wanting to exercise the option of premature redemption must keep this in mind, as the request for premature redemption will have to be raised within this timeframe only, post which the investor will have to wait for the next premature redemption window," says Sharma.

It must also be noted that interest on SGBs is paid semi-annually, and the premature redemption window is open twice a year for the specific SGB.

Why is there a 10-day gap followed in SGB premature redemption timeline?

There is a 10-day gap from the last date of premature redemption and the interest payment. For example, the interest payment date for SGB 2018-19 Series V was January 22, 2024, so the premature redemption window was between December 22, 2023 and January 12, 2024. The 10-day gap is between January 22, 2024 (interest payment date) and the last date to offer the said SGB for premature redemption, i.e., January 12, 2024.

The table below shows the interest (coupon) payment dates of the bonds and the last date to offer the said SGB for premature redemption.

RBI SGB premature redemption calendar

Source: RBI Press Release

According to Chand, "As per the operational guidelines issued by the RBI to Banks etc, the request for premature redemption of SGB is required to be submitted to the Receiving Office or Depository through Depository Participant (if held in Demat account) at least 10 days before the next interest payment date, that is why there is a 10-day gap before coupon date."

Explaining the rationale for the 10-day gap between the interest payment of an SGB and the last date to offer it for premature redemption, Chand said that this time gap is used as a buffer period in case anything else is required from the SGB investor.

"The time gap exists so that if required then the Receiving Office/Depository Participant/Depository can call for additional documents, KYC proof, declaration etc from the SGB investor. Every SGB redemption request is required to be scrutinised in order to verify the correctness of the particulars and before submission to RBI through the E-Kuber Portal at least four days before the due date of interest payment for the respective SGB," says Chand