The taxation of Sovereign Gold Bonds remains a little unclear at the moment. Although the rules are clear on the taxation of capital gains on the redemption of the bonds after maturity, there seems to be some ambiguity if the bonds are redeemed before their maturity. Also, there is clarity on TDS and taxation of interest earned on SGBs. The interest earned from Sovereign Gold Bonds will be taxable as income from other sources while TDS is not applicable on the bond.
As per the rules, the capital gains tax arising on redemption of SGB to an individual has been exempted. “Transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an individual is not regarded as a taxable event and hence will not attract tax. The law simply comments on ‘Transfer by way of redemption’. There is no separate provision for redemption before maturity and redemption after maturity”, says Homi Mistry, Partner, Deloitte India.
Sovereign gold bonds (SGB) are issued by the government for a period of 8 years and they carry half-yearly interest payments based on the coupon rate. Early encashment / redemption of the bond is allowed after 5th year from the date of issue on coupon payment dates. In case of premature redemption, investors can approach the concerned bank/SHCIL offices thirty days before the coupon payment date.
In such a case when redemption happens on due dates after 5 years, will there be tax on gains? “If the SGB Bonds are redeemed ( on stock exchange) after the lock-in period of 5 years and before the maturity of 8 years, Capital Gains Tax is applicable on the profits earned on SGB Bonds. But yes, Govt of India should come out with proper clarification on tax treatment on the Capital Gains earned on SGB Bonds redemption (after 5 years),” says Deepak Jain, Chief Executive, TaxManager.in
Even before the end of 5th year or 8th year, the bonds are allowed to be traded on stock exchanges, if held in demat form. It means they are transferable to any other eligible investor.
When sold on the stock exchange, the indexation benefit can be availed by investors. “If SGB are redeemed in less than three years of holding then gains are taxable as per the investor’s income tax slab rates. Long Term Capital Gain Tax will be applicable if SGB withholding period is more than three years, the gains are taxable under LTCG at 20% tax rate with indexation benefit. However, do note that if indexation benefit is not opted then 10% tax rate will be applicable,” adds Jain.