How a Sovereign Gold Bond is redeemed early: the fifth-year rule and the three-day gold price average
Background
The Reserve Bank's announcement of a Rs 14,725 per unit price for the 2019-20 Series V gold bond shows how the early exit from these bonds works.
Under the Government of India notification F.No. 4(7)-B(W&M)/2019 dated September 30, 2019, premature redemption may be permitted after the fifth year from the date of issue.
It is allowed only on a date on which interest is payable, not on any day the holder chooses.
The redemption price is not a fixed sum: it is the simple average of the closing price of gold of 999 purity over the three business days before redemption, as published by the India Bullion and Jewellers Association Ltd.
So a holder who exits early receives the market value of gold at that moment, which is why the Reserve Bank announces a fresh price for each tranche on each redemption date.
In plain words
999 purity 999 fineness gold — Gold that is 99.9 per cent pure, the grade used for the published benchmark price.
Premature redemption Premature redemption — Repayment of a bond before its full term, on the terms the issue notification allows.