Taxation on Sovereign Gold Bonds

Sovereign Gold Bonds (SGBs) were one of the most secure way to invest in gold in India. Besides offering the dual benefits of price appreciation and fixed interest income, SGBs also offered tax benefits. While SGBs are no longer issued by the RBI, existing bondholders continue to hold, trade and redeem their SGB holdings while also enjoying its tax benefits. Understanding how Sovereign Gola Bonds are taxed remains important for these investors to maximise post-tax returns and plan redemptions wisely.

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How Are Sovereign Gold Bonds Taxed?

Sovereign Gold Bonds are taxed on two of its components - interest income and capital gains.

Taxation on Interest Earned from Sovereign Gold Bonds

Those investing in Sovereign Gold Bonds receive fixed interest income at 2.5% p.a. in every 6 months (semi-annually). This interest income is added to your total income for the year and is taxed as per the investor’s income tax slab rate. For instance, if the investor’s income falls under the 30% income tax bracket, the interest earned on SGB would be taxed at 30%.
As there is no TDS (Tax Deducted at Source) on the interest income, investors will have to disclose it under the section ‘Income from Other Sources’ when filing their income tax returns to stay compliant.

Taxation on Capital Gains from SGB

If an investor sells his/her SGB holdings before its maturity date, i.e., before completing 8 years from the date of issuance, the investor will have to pay taxes on capital gains. Capital gains is the profit an investor makes on selling a capital asset, which in this case is SGB holdings. These gains are subject to taxation, depending on its period of holding.
SGBs held for a period of less than a year would be considered Short-Term Capital Gains (STCG) and if held for a period of more than a year would be considered Long-Term Capital Gains (LTCG).
Short-Term Capital Gains will be taxed as per the investor’s tax slab rates.
Long-Term Capital Gains will be taxed at 12.5% without indexation.

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SGB Tax Exemption Criteria

If an investor is holding his/her Sovereign Gold Bonds for 8 years, then any gains he/she makes would be tax free.

Taxation on SGB Redemption at Maturity

Sovereign Gold Bonds if held until maturity, i.e., 8 years or redeemed prematurely after 5 years, there is no capital gains tax.

Indexation Benefit on Sovereign Gold Bonds

The indexation benefit is a tax provision that helps investors reduce their taxable long-term capital gains by adjusting the purchase price of an asset for inflation. This is particularly relevant for SGBs sold on the stock exchange before maturity. The indexation benefits on long-term SGB capital gains will be provided to any person on transfer of bond.

Benefits of Sovereign Gold Bonds

The benefits of investing in Sovereign Gold Bonds are:

Investors receive fixed interest payments at 2.5% p.a. every 6 months.
No extra cost is involved in buying or holding these bonds.
The issue and the redemption price of SGBs are linked to the prevailing gold market price, as published by the India Bullion and Jewellers Association Limited (IBJA), thereby, ensuring fair valuation.
It can be pledged as collateral for availing loans from banks and NBFCs.
Holding SGBs till its maturity date will exempt capital gains from taxation, thereby, enhancing the overall post-tax returns for individuals.
The bond value moves with the movement of gold price, thus, there is potential for capital appreciation on maturity or on early redemption.

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How to report SGB capital gains in ITR

In case these bonds were sold in the secondary market before its maturity date, then report it under the section “Income from Other Sources” in your ITR. Since no TDS is deducted, investors should ensure to report it when filing their taxes. When reporting capital gains in your ITR keep your SGB holding certificate or transaction statement from RBI or your bank handy.

How to Buy Bonds through Paisabazaar?

Get up to 13.25% from bonds in 5 simple steps

Step 1: Login to your Paisabazaar account

Step 2: Select the Bonds

Step 3: Complete the KYC process

Step 4: Enter bank details

Step 5: Link your demat account

FAQs

Yes, redeeming your SGB holdings early will be taxed.

No, the capital gains tax exemption is applicable only on the redemption directly with RBI. SGBs bought on the stock exchange are subject to STCG or LTCG tax depending on the holding period.

No. Investments in SGBs do not qualify for Section 80C deductions.

Yes. The 2.5% p.a. interest from SGBs is fully taxable under Income from Other Sources and must be reported in your ITR.

If the SGB holdings are sold before maturity, the taxation would depend on the holding period. Short-term capital gains from SGBs are taxed as per the investor’s income tax slab. Long-term capital gains are taxed at 12.5% without indexation.