Tax Implications of Buying Sovereign Gold Bonds

A good investment portfolio needs a balance of high-risk and low-risk investment instruments. Since gold is a non-market linked asset, it can help hedge against inflation.   

Traditionally, physical gold has been a popular form of investment among Indians. However, a lot of investors have now turned to digital gold investments like Sovereign Gold Bonds, ETFs, and digital gold.

This blog will answer common queries around SGB returns and tax implications. But before we get to tax implications, let’s understand Sovereign Gold Bonds and how they work. 

Important: This blog is meant to educate readers and the information furnished here is not to be construed as investment advice from Cube Wealth. You can consult a Cube Wealth coach or download a Cube Wealth app. 

What Are Sovereign Gold Bonds?

Sovereign gold bonds are government securities issued in grams of gold. Sovereign Gold Bonds were made available to Indian investors in November 2015.   

SGBs are paper gold investments so you do not have to worry about storage or security issues. They are similar to digital gold by Safegold on the Cube Wealth app. 

However, the digital gold that you invest in on the Cube Wealth app is backed by real 24K physical gold, unlike SGBs. Read this blog to know if you should consider buying digital gold in 2021. 

SGBs are low-risk investments but offer comparatively lower returns than mutual funds or stocks. However, the interest that you earn is fixed and is around 2.50%.

SGBs are issued by the Reserve Bank of India in multiples of one gram. The minimum amount that can be bought is one gram and the maximum is 4 kg for individuals and Hindu Undivided Families. 

They are issued for a term of 8 years and cannot be withdrawn before 5 years. After that, they can be sold in the secondary market; the bonds will be valued at the existing market price of gold. 

The secondary market (stock market) is where traders buy and sell shares that are already listed on the stock exchange. Read this blog to know how to start investing in the share market. 

Tax Implications Of Buying Sovereign Gold Bonds

An important part of understanding tax implications on SGBs is to know how sovereign gold bond returns work. 

Returns On Sovereign Gold Bonds

By investing in SGBs, you get returns in two ways.

1. Interest Income 

SGBs pay a fixed amount of interest twice a year. The rate of interest is 2.50% per annum on the invested amount.

2. Capital Gains 

Profits made from SGB trading are categorised as capital gains. The difference between the purchase price and selling price accounts for capital gain on an SGB.
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Tax On Interest Income

The interest earned on SGBs is taxable as per the Income Tax Act, 1961. The annual interest earned is added to the investor’s annual income and taxed as per applicable tax slabs. 

Note: The tax applicable on income from SGBs is not deducted at source. 
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Tax On Capital Gains

There can be two scenarios here:

1. SGBs held till maturity (8 years)
2. SGBs redeemed prematurely

Let’s look at tax implications in both these cases.
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Tax Implications For SGBs Held Till Maturity

The SGB scheme offers a unique tax benefit. If you hold the bond for a term of 8 years, that is till maturity, then the capital gains tax is waived off.

Tax Implications For SGBs Redeemed Prematurely

SGBs have a lock-in period of 5 years. After 5 years, you can redeem or encash them. They can be traded on the stock exchange and can also be transferred to another investor. 

If you want to sell SGBs before the completion of 5 years, you can sell them in the secondary market, provided the bonds are listed.

If you are looking at preterm redemption, your options and tax implication vary according to the years completed from the date of purchase.

1. After 5 years 

If you are redeeming the bond after the completion of a five year period (from the date of issue), you’ll have to pay a long-term capital gains tax (LTCG) at 20% with added cess and indexation benefits. 

2. Before 3 years

If you are selling the bond before three years from the date of purchase, you’ll have to pay short-term capital gains (STCG) tax. The profit earned will be added to your annual income and taxed as per the applicable tax bracket. You can consult a Cube Wealth coach or download a Cube Wealth app. 

3. After 3 years 

If you are selling after three years, you will have to pay LTCG tax. The profit you make will be taxed at 20% along with added tax and indexation benefits.

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Summary

SGBs are preferred by investors as they give fixed returns as well as capital gains. However, SGBs come with a lock-in period of 5 years. There are more tax-efficient options like ELSS funds that come with a lower lock-in period.

Consult a wealth coach to understand whether you should invest in SGBs or Digital Gold by Safegold on Cube Wealth. Or if you want to explore more digital gold alternatives, you can download the Cube Wealth App to get started.

More from our blog series on gold-related investments:

1. 6 Best Ways To Invest In Gold In India

2. How To Buy Digital Gold Online

3. How Much of Your Portfolio Should be Invested in Gold?

4. Beginner’s Guide to Investing in Gold in India

5. What Are Gold ETFs?

FAQs 

1. How are short-term capital gains on SGBs taxed?

Ans. If you sell SGBs before maturity, short-term capital gains are taxed at your applicable income tax rate. The gains are added to your total income for the year and taxed accordingly.

2.  Is there any tax on the interest income from SGBs?

Ans. No, the interest income earned on Sovereign Gold Bonds is exempt from income tax under Section 10(15) of the Income Tax Act, 1961.

3. Can I use indexation to reduce the tax on capital gains from SGBs?

Ans. Indexation benefit is not available for SGBs, as the capital gains are calculated based on the original investment amount.

4.  Are there any tax implications if I inherit SGBs?

Ans. If you inherit SGBs, there are no immediate tax implications. However, any future capital gains upon selling them would be subject to capital gains tax based on your holding period.

Conclusion 

Investing in Sovereign Gold Bonds offers tax advantages, especially when held until maturity. Long-term capital gains are fully exempt from tax in such cases. However, it's essential to consider the tax implications if you plan to sell the bonds before maturity. Short-term capital gains will be subject to your applicable income tax rate. You can consult a Cube Wealth coach or download a Cube Wealth app. 

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