In today’s digital era, investors seek alternative ways to invest in gold. One such option is the Sovereign Gold Bond (SGB). Introduced by the government to curb the demand for physical gold. SGBs offer a modern, efficient way to invest in gold without the associated economic and logistical challenges. They provide the same benefits of gold investment, such as value retention and inflation protection, while eliminating the need for storage making them a secure and convenient choice for modern investors.
What is a Sovereign Gold Bond?
SGB i.e. Sovereign Gold Bond are bonds the government of India issues under the Sovereign Gold Bond (SGB) Scheme. SGB is government security denominated in grams of gold, thus it is an alternative to holding physical gold. Investors such as Individuals, HUF, trusts, universities, and charitable institutions can invest in SGB. RBI (Reserve Bank of India) issues such bonds to investors at an issue price with a fixed maturity. Here are the key points:
- Each bond represents 1 gram of gold. and the maturity period of SGBs is 8 years.
- The bonds offer 2.5% annual interest, paid semi-annually.
- Individuals can invest a minimum of the price of 1 gram of gold and the maximum investment limit is 4 kg.
- The RBI issues SGBs in tranches which is a time frame of 4-5 days to buy SGBs.
- You can withdraw early after 5 years and can trade SGBs in the secondary market after issuance.
Income Head for Sovereign Gold Bond
Capital Gains on Sale of SGB
The definition of transfer of a capital asset as per Section 2(47) of the Income Tax Act covers both redemption and sale. Hence, whenever the taxpayer sells or redeems their SGB holding, the capital gains will arise and they have to pay taxes on the same. Here, the redemption of SGB means its expiry on the date of maturity (including pre-mature redemption), and the transfer of SGB means its sale on a recognized stock exchange. However, under the definition of transfer of capital asset, the redemption of SGB is specifically excluded.
IFOS Income from SGB
The RBI on behalf of the government pays periodical interest on SGB. The interest rate is 2.5% per annum on the initial investment amount. This interest is credited semi-annually and the last interest is payable to the investor on the maturity date along with the principal.
Interest on SGB is taxable under the head IFOS (Income from Other Sources). The taxpayer has to report the interest under Schedule OS in the Income Tax Return.
Sovereign Gold Bond Taxation
Tax Treatment on Sale or Redemption
- Redemption of Sovereign Gold Bond – The definition of transfer of capital asset specifically excludes redemption of SGB. Hence, the Capital Gain on the Redemption of a Sovereign Gold Bond by an Individual Investor is exempt from tax. That means you do not have to pay any taxes on the capital gains from these bonds. SBG can be withdrawn early after 5 years.
- Transfer of Sovereign Gold Bond – If the individual investor transfers the Sovereign Gold Bond by selling it on the stock exchange, it is taxable as LTCG if held for more than 12 months at the rate of 12.5%. However, if the SGB is held for up to 12 months, it will be taxed at the slab rates applicable to the taxpayer.
| Type of SGB Investment | Holding period | Tax Rate |
| SGB Redeemed on maturity | NA | Gains are tax-exempt |
| SGB sold in secondary market | <12 months | Slab Rate |
| SGB sold in secondary market | >12 months | 12.5% |
| Type of SGB Investment | Holding period | Tax Rate |
| SGB Redeemed on maturity | NA | Gains are tax-exempt |
| SGB sold in secondary market | <12 months | Slab Rate |
| SGB sold in secondary market | 10% without indexation or 20% with Indexation | 10% with out indexation or 20% with Indexation |
Tax Treatment on Interest
The Interest on SGB is taxable at slab rates under the head IFOS (Income from Other Sources). Further, Section 193 for TDS on Interest on Securities specifically excludes tax deductions on payment of interest on government security. Thus, TDS is not applicable for payment of interest on SGB.
FAQs
SGB is a government security that investors hold in demat form thus eliminating the risk and cost of holding physical gold. The investment in SGB is safer than physical gold since SGB is government security, pays periodic interest, and assures the market value of the asset on maturity.
If the investor buys SGB from the secondary market and redeems it after holding it until maturity, here is the tax treatment:
– Exempt if you are an Individual Investor
– Taxable at slab rates if STCG and at 20% with indexation benefit if LTCG if you are any other investor.
The bonds bear interest at the rate of 2.5% p.a. on the initial investment amount. Additionally, the interest will be credited semi-annually to the investor’s bank account and the last interest will be payable on maturity along with the principal.
The interest and redemption amount will be credited to the bank account furnished by the customer when buying the bond.
Yes. The bonds can be held in the Demat account. A specific request must be made in the application form itself. Until dematerialization is completed, the bonds will be held in RBI’s books. The facility for conversion to Demat will also be available after the allotment of the bond.
Thanks for this article.
With regards to tax, how about the situation where it’s bought in the secondary market, say we buy this in the fourth year and held till maturity (held for four years).
Yes I have the same query.
Lets say investor misses out to buy in primary market and buys it in secondary market once it is listed. What will be the taxation if held till maturity.
Indexation benefit is still available for SGB for LTCG (sold before maturity)?
It got removed from all debt products last year?
Hey @Gowtham @Saurabh_Gupta1,
If you buy SGBs from the secondary market and hold them till maturity, the capital gains will be exempt from taxes.
Moreover, yes indexation benefit is available on SGB.
Hope this helps!
Hello @TeamQuicko,
I have a few queries on SGB taxation.
Thanks,
Vivek R Shenoy
Hey @VRS1995,
With regard to your queries,
Hope this carifies!
Why is Gov. (via RBI) issuing SGBs apart from the regular bonds?
(I understand this isn’t tax related, but I’ll be glad if you guys can answer this.
)
Hey @Augustine_Charly ,
Normally, the SGBs are issued by RBI and guaranteed by government. This is the only form of gold that pays interest. Issuing SGBs not only bring down the demand of physical gold but also track import-export activities. There may be transparent and fair pricing of gold as it is now regulated by RBI.
Unlike physical gold, SGBs are free from theft, risk and holding charges as it is fully backed by Indian government. Black money also plays important role to issue gold bond.
Here you can read the below article for more understanding about SGBs:
I hope, it helps!
Hey @Droid_Droid ,
The interest on Sovereign Gold Bonds (SGBs) at 2.5% p.a is calculated on the initial amount of investment and paid semi annually.
Out of the two scenarios that you presented, the first one is correct.
You can refer the RBI FAQ’s on Sovereign Gold Bonds in the below link. Please refer point number 14 for your query.
https://m.rbi.org.in/scripts/FAQView.aspx?Id=109
Hope it helps!
Hey, transfer of SGB issued by RBI under Sovereign Gold Bond scheme 2015, by way of redemption by an individual shall be tax exempt.
If I held SGB till matutity, How do I show capital gain in itr 2 as it is non taxable?