Taxation of Sovereign Gold Bonds (SGBs)

Though there are a number of investment avenues like mutual funds, ETFs, stocks, real estate, etc. in the modern age gold has always been at the top of the choices of the Indian investors. Even when you are investing in high-risk avenues like stocks & mutual funds, you must certainly have some gold or fixed deposits in your portfolio to balance the investment risk.

With respect to investing in gold, there are many options for investors nowadays where they need not invest directly in gold but take benefit from appreciation in the gold prices. You can buy gold in digital form like Digital Gold, Gold ETF, Gold Mutual Funds, etc. Understanding the interests of the Indian investors, the Government of India launched a sovereign Gold Bond Scheme where any person can buy gold in digital form and earn interest on such investments in addition to capital appreciation. This article focuses on analyzing the taxation implications of investment in Sovereign Gold Bonds.

Meaning of Sovereign Gold Bond

Sovereign Gold Bonds are the bonds issued by the Government of India which represents the gold in the digital mode. Sovereign Gold Bonds could be held by any investor in dematerialized form without any requirement to keep physical gold. Issue price of the SGBs is notified by the government from time to time. You can buy the bonds at such notified rates.

Advantages of investment in Sovereign Gold Bonds

Investment in Sovereign Gold Bonds carries many benefits which are discussed below:

• The most important benefit of the SGBs is that they are risk-free. SGBs are issued by the Government of India so investments in SGBs are 100% risk-free.
• Holding gold in physical form always has threats of theft, robbery, etc. There is no such risk in the case of SGBs as these can also be kept in digital form in the Demat account of the holder.
• More importantly, the Government of India gives interest @ 2.5% per annum on SGBs (on half-yearly basis).

Disadvantages of Sovereign Gold Bonds

• The investment duration of SGBs is 8 years, in which for the first 5 years, the investor cannot redeem the bonds in any condition whatsoever.
• Further, Gold is highly volatile. Lock-in-period in SGBs might lead to losses for the investor in case of a fall in the gold prices in the international market.

Taxation implications on Sovereign Gold Bonds

Following are the tax implications on redemption & purchase and sale of Sovereign Gold Bonds:

If Gold Bonds are held till maturity:

• Sovereign Gold Bonds have a maturity period of 8 years. In case, you hold SGBs till their maturity, the capital gain arising on redemption of SGBs shall not be taxable as per the Income Tax law. It means that you will get back the redemption proceeds of SGBs 100% tax-free. 
• However, 100% tax exemption is available to individual taxpayers only and not to other categories like HUF, trusts, etc.

If Gold Bonds are redeemed after 5 years:

• If SGBs are premature after a minimum lock-in period of 5 years from the date of purchase but before its maturity, the sale proceeds will be subjected to Long Term Capital Gains (LTCG) where the tax rate is 20% plus surcharge & cess subject to indexation benefits. Indexation benefit means recalculation of purchase price taking effect of inflation which ultimately reduces your tax payable on gains arising on the sale of SGBs.
• The Long-Term Capital Gain (LTCG) shall be chargeable to tax at the flat rate of 10% in case of indexation benefit is not opted for, while filing income tax return.

Sale of Gold Bonds in the secondary market before 5 years:

Gold Bonds are listed on stock exchanges. So, you can also buy and sell them through the stock exchanges. In the case where gold bonds are sold before 3 years, it shall be treated as “Short Term Capital Gains” and shall be taxed as per the normal applicable tax rates in the income tax return.

Treatment of interest income on Sovereign Gold Bonds

• Interest earned on SGBs shall be taxable under the head “Income from other sources” in the ITR filing and taxed at normal tax rates applicable to the taxpayer. 
• As per Section 193(iv) of the Income Tax Act, 1961, no TDS is applicable on interest paid on Government securities. SGBs are also categorized as “Government Security”. Therefore, no TDS is deductible on interest paid on SGBs.

Frequently Asked Questions (FAQ)

Who is eligible to invest in Sovereign Gold Bonds?

All Resident Indians are eligible to invest in Sovereign Gold Bonds. This includes individuals as well as HUF, trusts, charitable organizations, etc. If the residential status of the investor subsequently changes from resident to non-resident, he can continue to hold SGB till early redemption or maturity.

Can a minor invest in Sovereign Gold Bonds?

No, A minor cannot directly invest in SGBs. However, the Guardian/ parents of such a minor can invest on behalf of the minor.

Who issues Sovereign Gold Bonds in India?

Reserve Bank of India issues SGBs in India. The Government of India has authorized RBI to form regulations and notify interest rates in respect of SGBs.

What are the limits of investment in Sovereign Gold Bonds?

• Gold Bonds are issued in units where one unit is equal to one gram.
• You will have to purchase at least one gram i.e. 1 unit whereas the maximum investment allowed in the case of individual & HUF is 4 kg. per investor.
• In the case of other entities, 20 kg. of gold is the permissible limit.

How is the redemption price of Sovereign Gold Bonds determined?

The redemption price of SGBs is calculated on the basis of the last three days' average closing price of gold of 999 purity. Such closing prices are published by the Indian Bullion and Jewellers Association Limited.

Can Sovereign Gold Bonds be purchased in joint names?

Yes, SGBs can be purchased and held in joint names. But in the case of joint holding, the threshold investment limit shall apply to the First holder.

Can Sovereign Gold Bonds be purchased online?

Yes, you can apply for SGBs online through the websites of various commercial banks. In the case of an online subscription, a discount of Rs. 50 per gram is allowed to the subscriber.

Can I borrow from banks against the collateral of sovereign gold bonds?

Yes, the banks accept the SGBs as eligible collateral against loans.

How to purchase sovereign gold bonds in India?

SGBs can be purchased in either offline or online mode. As already discussed, if you buy SGBs online, you will get a discount of Rs. 50 per gram. You can subscribe to the SGBs through any of the following agencies:

• Stock Holding Corporation of India Limited
• Designated Post Offices
• Nationalized banks, Scheduled Commercial banks

Conclusion:

In India, emotional values are attached to gold. Also, gold carries social value in India. Wearing gold is considered necessary on festive occasions and marriages. Sovereign Gold Bonds cannot replace those emotional and social values. But as the risk associated with holding physical gold has increased, there has been a substantial increase in the interest of the public in SGBs. SGBs also render the investor a fixed return of 2.5% annually in addition to value appreciation. Therefore, SGBs are becoming popular day by day. Further, exemption from capital gain tax makes it more attractive.