Should I pay tax on Sovereign Gold Bonds (SGB)?

Should I pay tax on Sovereign Gold Bonds (SGB)Should I pay tax on Sovereign Gold Bonds (SGB)?


One of the best ways to invest in gold is investing through Sovereign Gold Bonds (SGBs). SGBs can be purchased through RBI directly or through secondary market from stock exchanges. These SGBs would get matured after completion of 7 years. Investors of these bonds can also do pre-mature withdrawal after 5 years. Investors would get regular interest from these gold bonds. One can get capital gains on selling these SGBs either in secondary market or on maturity. The taxation of SGBs  is little tricky. In this article we would provide how sovereign gold bonds are taxed both from returns perspective as well as from capital gains perspective.

Also Read: Old Vs New Income Tax Regime – Check which is beneficial for you

Basics of Sovereign Gold Bond Scheme

Indians have been buying gold on all auspicious and festival occasions, even though there is no requirement of gold considering the price appreciation in the future. In view of this, Govt of India has been issuing Sovereign Gold Bonds where one can invest in gold in grams, get interest every 6 months and also get the equivalent amount of gold amount on maturity. This is as good as investing in physical gold, but through electronic form and get interest every 6 months in addition.

Taxation on Sovereign Gold Bonds

Here are the following things that would come into the picture for Sovereign Gold Bonds from a taxation perspective.

1) Taxation of interest received on Sovereign Gold Bonds

2) Taxation of capital gains on Sovereign Gold Bonds

i) Tax on capital gains on maturity

ii) Tax on capital gains arising at 5 years from the issue date

iii) Tax on capital gains arising from selling the gold bonds in the secondary market

Let us check these aspects in detail.

1) Taxation of interest received on Sovereign Gold Bonds

SGB’s offer interest rate of 2.5% per annum. This interest is paid every 6 months, i.e. 1.25% every 6 months.

This interest received from gold bonds is taxable in the hands of taxpayers.

This interest is taxable based on the income tax applicable to the bond holder. E.g. If the person is in the 30 % tax bracket, they need to pay 30% tax on such interest.

There is no TDS deducted on the interest paid. However, bond holders need to show this interest income, pay income tax and file income tax returns accordingly.

2) Taxation of capital gains on Sovereign Gold Bonds

Let us now check the tax aspect of capital gains on these gold bonds.

a) Capital gains on maturity

Sovereign gold bonds would be redeemed on maturity after completion of 8 years. Capital gains arising on maturity is tax free. Means irrespective of how much capital gains you might get on these gold bonds, you need not pay any income tax. This is special benefit provided by Govt of India for those who have shifted from physical gold to gold bond scheme.

b) Capital gains arising at 5 years from the issue date

Sovereign Gold Bonds provides an option for bond holder to redeem before maturity period, i.e. at 5 years from the date of subscription. Such bonds are redeemed with RBI directly. If you are redeeming at 5 years, the capital gains are taxable. Since the time frame is 5 years, such gains are treated as long term capital gains (> 3 years are LTCG). Such long term capital gains are taxed at 20% with indexation benefits.

b) Capital gains arising from selling the gold bonds in the secondary market

Sovereign Gold Bonds are listed on stock exchanges and these are assigned a unique ISIN number after 6 months from the date of issue. These can be sold on stock exchanges any time after the listing. If there are any capital gains arising from selling sovereign gold bonds on stock exchanges, such capital gains are taxable.

Also Read: 22 Unique Ways to save income tax in India

If the SGBs are sold within 3 years from the date of subscription, any gains arising are considered as Short Term Capital Gains (STCG). These STCG are added to the gold bond investor’s annual income and income tax is charged is paid as per their individual tax slab. E.g. if the investor is 30% tax bracket, they need to pay 30% tax on such short term capital gains.

If the SGBs are sold after 3 years from the date of subscription, any gains arising are considered as Long Term Capital Gains (LTCG). Such long term capital gains (LTCG) are taxed at 20% with indexation benefits.

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Suresh KP

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