Sovereign Gold Bonds (SGB) Taxation

Sovereign Gold Bonds (SGB) tax implications are crucial to understand for investors looking to maximise returns from their gold investments. Sovereign Gold Bonds, issued by the Reserve Bank of India, provide a secure alternative to physical gold, offering additional tax benefits. These bonds not only track gold prices but also provide periodic interest to investors.

Tax on SGB (Sovereign Gold Bonds)

Understanding the tax on SGB structure helps investors make informed decisions about their investment timeline and redemption strategies. The taxation of Sovereign Gold Bonds varies based on factors such as holding period, redemption type, and interest earned, making it essential to understand these nuances before investing.

What is the SGB tax?

SGB tax refers to the taxation framework applicable to investments made in Sovereign Gold Bonds. These tax implications fall broadly into two categories: tax on interest income and tax on capital gains. The interest earned on SGBs (currently 2.5% per annum) is taxable as per the investor's applicable income tax slab rate and is added to their total taxable income. Meanwhile, the tax on Sovereign Gold Bond capital gains depends on whether the bonds are redeemed at maturity or sold in the secondary market before maturity. This tax structure is designed to encourage long-term gold investment through the sovereign route, rather than through physical gold purchases. Understanding these SGB tax implications helps investors properly plan their investment horizon and calculate potential post-tax returns.

Are Sovereign Gold Bonds tax-free?

No, Sovereign Gold Bonds are not entirely tax-free, but they do offer significant tax advantages compared to other gold investment options.

• Interest income (2.5% per annum) is fully taxable as per your income tax slab rate
• Capital gains on redemption at maturity are completely tax-exempt, making SGBs highly advantageous for long-term investors.
• Capital gains from selling SGBs in the secondary market before maturity are taxable based on the holding period.
• No Wealth Tax applies to SGBs, unlike physical gold, which may be subject to wealth tax.
• No Tax Deducted at Source (TDS) is applied to interest earned, although interest exceeding ₹5,000 may be subject to TDS at 10% under certain conditions.
• Sovereign Gold Bonds taxation is more favourable compared to other gold-based investment products, especially for investors with an 8-year horizon.

Capital gains tax on SGB

The taxation of Sovereign Gold Bonds regarding capital gains varies based on how and when you exit your investment:

• Capital gains arising from redemption at maturity (after 8 years) are entirely exempt from tax.
• Short-term gains (if sold within 12 months) are taxed according to your income tax slab rate.
• If held for over 12 months, long-term gains will incur a tax rate of 12.5% without indexation benefits.
• Tax on SGB capital gains can be offset against capital losses from other investments as per the income tax rules.
• The capital gains are calculated based on the difference between the selling price and the original investment amount.

Tax on Sovereign Gold Bonds interest

The interest component of SGBs is taxed differently from the capital gains component:

• Interest earned on SGBs (currently 2.5% per annum) is fully taxable as per your income tax slab
• Interest is paid semi-annually, with each payment being added to your taxable income for that financial year
• For example, on an investment of ₹1 lakh, you would earn ₹2,500 annually as interest, which would be taxed based on your income tax bracket.
• The interest income must be declared under 'Income from Other Sources' in your income tax return.
• There is no TDS on interest payment, but you're required to self-declare and pay tax as applicable.
• If your total income is below the taxable limit, you can submit Form 15G/15H to avoid TDS on interest exceeding ₹5,000
• Tax on sovereign gold bonds interest cannot be avoided or deferred, unlike capital gains, which can be tax-exempt on maturity.

SGB tax exemption criteria

• Complete exemption on capital gains is available only if SGBs are held till maturity (8 years from issue)
• The early redemption option becomes available from the 5th year onwards on interest payment dates; however, this may impact tax benefits.
• If redeemed early through the RBI's early redemption window, capital gains tax would apply based on the holding period.
• For secondary market transfers, the holding period determines the applicable tax rate and indexation benefits.
• No specific income limit or investment ceiling for availing the capital gains tax exemption
• The exemption is available to all categories of investors, including individuals, HUFs, trusts, and non-residents.
• No requirement to reinvest the proceeds in any specific instrument to claim the capital gains tax exemption
• Proper documentation of the purchase price and date is crucial for claiming indexation benefits on pre-maturity sales.

Benefits of Sovereign Gold Bonds

SGBs offer numerous SGB tax benefits that make them superior to physical gold investments:

• Complete exemption from capital gains tax if held till maturity (8 years), a benefit not available with gold ETFs or physical gold
• Additional income through interest payments at 2.5% per annum, which physical gold doesn't provide
• No GST on purchase, unlike physical gold, which attracts 3% GST
• No wealth tax implications, making them more tax-efficient for high-net-worth individuals
• No storage costs or insurance expenses associated with physical gold
• Ability to use SGBs as collateral for loans, enhancing liquidity
• Ease of gifting without gift tax implications between specified relatives

Also Read: What is SGB?

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.