Investments in Sovereign Gold Bonds (SGB) not only help the investor save money to keep the gold secure, but also provide 2.5 per cent annual interest (payable half yearly) on the nominal value of the investment.
While the duration of investment in SGB is for 8 years, to infuse liquidity, the Bonds are listed on security exchanges for transactions during the investment term. The Reserve Bank of India (RBI) also provides the opportunity of premature redemption to the investors to redeem their Bonds after 5 years from the date of maturity.
The tax rules differ with the differences in the mode of earnings from the SGB.
Interest on SGB
The interest earned on the investment in SGB is taxable. The interest is added to the total income of an investor and is taxed accordingly.
Capital gains on SGB may arise at the time of transferring the bonds through transactions in stock exchanges, at the time of maturity or by availing the opportunity of premature redemption provided by the RBI after 5 years from the date of issue of the SGBs.
Capital Gain on Transfer
Gains on transfer of SGB through a stock exchange within 3 years from the date of investment are considered short-term capital gains and are added to the total income of the investors and are taxed accordingly.
Gains on transfer of SGB through a stock exchange on or after 3 years from the date of investment are considered long-term capital gains. Such long-term capital gains may be taxed either at a rate of 20 per cent after indexation or at 10 per cent without indexation.
Capital Gain on Maturity
The capital gain on maturity of SGB is tax free u/s 47(viic) of the Income Tax Act, 1961.
Capital Gain on Premature Redemption
The RBI provides the SGB investors opportunities for premature redemption of SBG after 5 years at a given price.
However, there are confusions regarding tax on such premature redemptions.
“Section 47(viic) of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) provides that the capital gains arising on redemption of Sovereign Gold Bonds (SGBs) would be tax exempt. However, premature transfer before redemption would attract capital gains tax,” said Dr. Suresh Surana, Founder, RSM India.
“It is pertinent to note that the RBI provides the investor with an option to redeem such bonds after the expiry of lock in period of 5 years. The provisions of law do not provide clarity on whether the tax exemption benefit would be available only when the redemption is held till the maturity period of 8 years or also extended when such bonds are redeemed (not transferred) after 5 years of lock in period,” he added.
“Thus, in the absence of such legal clarity, it is recommended to take a conservative view on the same (which is also a general practical approach adopted) and not extend the benefit of tax exemption to redemption of SGBs after a lock in period of 5 years but before the maturity period of 8 years. Accordingly, if the investor redeems his sovereign gold bonds after the lock in period of 5 years, he would be subjected to a tax at a rate of 20 per cent (after availing the benefit of indexation) or 10 per cent (without availing the benefit of indexation) u/s 112 of the IT Act,” Dr. Surana further said.