Tax Implications of Buying Sovereign Gold Bonds

Tax Implications of Buying Sovereign Gold Bonds

There has been a lot of noise regarding the sovereign gold bonds, and there have also been plenty of speculations regarding the same. If you are someone who is interested in buying sovereign gold bonds, then you will need to understand the various tax implications also attached to it, which we will be discussing here.

Today, we will discuss Sovereign Gold Bonds (SGBs) and the tax consequences that investors should be aware of.


What are Sovereign Gold Bonds, and how do they work?

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Gold has more religious and cultural importance in India than it does in the United States. While purchasing actual gold was once the only way to engage in this asset class, various innovative forms of securities have been introduced in the previous two decades to allow investors to participate in the precious yellow metal.

Bonds in multiples of one gramme of gold are issued. Individuals and HUFs can invest as little as one gramme and four kilogrammes, while trusts and other organisations can invest up to twenty kilogrammes, as determined by the government.

Furthermore, these bonds are issued for eight years. Only after five years of investment is it possible to take a premature withdrawal. Investors can also sell the bonds on the secondary market at the current gold market price.

Explainer: What is the 'Sovereign Gold Bonds Scheme'?


The Advantages of Lending in Sovereign Gold Bonds


  1. There is no danger in handling physical gold.


  1. An annual interest rate of 2.75 per cent is guaranteed on the first investment.


  1. There is no TDS on the interest indexation benefit if the bond is transferred before maturity. Redemption is exempt from capital gains tax.


  1. Before the issue date, RBI will declare the price, which will be based on the preceding week’s simple average of gold 999 pure closing prices provided by IBJA.


  1. Both in terms of the redemption amount and the interest


  1. The bond has an 8-year term with a redemption option starting in the fifth year on the date interest is due.


  1. SGB can be utilised as loan security.


  1. Trading in Tranche 1 began on the 13th of June 2016.


Features of a Sovereign Gold Bond include:


SGBs are gold-denominated government securities (1 unit = 1 gramme).


The Reserve Bank of India issued this note on behalf of the Indian government.


Investors will get profits based on the price of gold.


Bonds will be backed by the government, both in terms of redemption and interest.


One gramme is the minimum investment; 500 grammes is the total commitment.


DEMAT and paper versions are both available.


Buying Sovereign Gold Bonds Has Tax Consequences:

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Before we get into the tax issues, let’s look at the potential profits from purchasing Sovereign Gold Bonds.


 Sovereign Gold Bond Returns:


Sovereign Gold Bonds offer two different forms of returns.


Interest Income, these bonds pay interest twice a year on the amount invested at a rate of 2.50 per cent each year.


Sovereign Gold Bonds are issued at current market gold rates at the moment of purchase, resulting in a capital gain. When an investor redeems bonds (either at maturity or prematurely), the selling price is determined by the current gold market price on the redemption date. If the price of gold has climbed since the purchase date, the investor has made a profit.


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The following is the tax treatment:


The interest earned on the holdings of Sovereign Gold Bonds is taxable under the Income Tax Act of 1961. Interest collected over a financial year is combined with the investor’s annual income and taxed according to the applicable tax slabs. Investors should remember that the interest paid on these bonds is tax-free (tax deducted at source).


SGBs held till maturity (8 years) have the following tax implications:


Other vehicles, such as gold mutual funds and gold ETFs, do not benefit from tax as sovereign gold bonds do. If a security is held until it matures (8 years), it is not subject to capital gains income tax. This is a programme by the Indian government to assist people in transitioning from physical to non-physical gold. To set it another way, if you hold an SGB until it matures, you won’t have to pay capital gains tax.


Prematurely redeemed SGBs have income tax implications:


You have two alternatives if you want to cash out your investments before they mature:


Short-Term Capital Gains (STCG): If the bond is sold within three years of acquisition, the capital gains remain taxed as short-term capital gains (STCG). These profits will be included in the investor’s annual income and taxed according to the applicable tax brackets.


Long-term capital gains (LTCG): If a bond is sold after three years from the date of purchase, the capital gains are taxed as long-term capital gains (LTCG). These profits are charged at a rate of 20%, plus cess and indexation benefits.




Investing in SGBs has several advantages for investors. They are one of the safest kinds of investing in India because the government backs them. While there are risks associated with gold price and demand fluctuation, the government’s backing ensures no possibility of repayment default. SGBs make gold investing simple and give the chance to earn regular interest as well as capital growth.




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