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How Sovereign Gold Bonds are Taxed: Implications for Investors

10 Mins 15 May 2023 0 COMMENT

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. SGBs allow investors to invest in gold without the need for physical storage, making them a safe, convenient, and cost-effective investment option. 

SGBs are issued in multiple tranches throughout the year, and investors can purchase them from designated banks, post offices, and stock exchanges. The price of the bonds is linked to the prevailing market price of gold and is announced by the RBI before each tranche. SGBs have a tenure of 8 years, with an exit option available after the fifth year on the interest payment dates and can be sold in secondary markets.

SGBs provide investors with a fixed interest rate of 2.5% per annum, payable semi-annually. They are also tradable on stock exchanges, providing investors with liquidity. SGBs offer several benefits, such as no risk of theft, purity in gold, and exemption from capital gains tax on redemption.

Advantages and Disadvantages of SGBs

Advantages:

Fixed returns: SGBs offer a fixed interest rate of 2.5% per annum, payable semi-annually, which provides investors with a regular and stable income stream. This feature can be particularly attractive to risk-averse investors who prefer steady returns.

Tax benefits: SGBs offer tax benefits to investors, making them a tax-efficient investment. For instance, capital gains arising from the redemption of SGBs are exempted from the capital gains tax, provided the investment is held till maturity. Moreover, interest income earned on SGBs is taxable under the Income Tax Act but is eligible for indexation benefits.

Liquidity: SGBs are tradable on stock exchanges, which provides investors with liquidity. Investors can easily buy and sell SGBs on stock exchanges, making it a liquid investment option.

Disadvantages:

Limited liquidity: While SGBs are tradable on stock exchanges, they may not be as liquid as physical gold. During certain market conditions, the demand for SGBs may reduce, which can lead to lower liquidity.

Long tenure: SGBs have a tenure of 8 years, with an exit option available after the fifth year on the interest payment dates. This long tenure may not be suitable for investors who prefer short-term investments or require liquidity.

Market risk: The price of SGBs is linked to the market price of gold and is subject to fluctuations. Therefore, investors may face some market risk, and the value of their investment may vary depending on the prevailing market conditions.

Tax Implications of SGBs

Under Section 80C of the Income Tax Act, there are no tax benefits available for the lump sum deposit of Sovereign Gold Bonds (SGBs). The interest earned on SGB deposits is also not exempted from tax and must be declared as "Income from Other Sources" during tax returns. The tax liability on the interest earned will be as per the individual's income tax slab. However, there is no Tax Deducted at Source (TDS) applicable on SGBs.

One of the most significant tax benefits of SGBs is that they are exempt from capital gains tax if held until maturity. Capital gains tax is applicable if SGBs are sold before maturity. 

Another tax benefit of SGBs is that they are not considered "wealth" for the purpose of wealth tax. Therefore, investors need not pay any wealth tax on their investment in SGBs.

Here are some more tax implications you should be aware of:

  • Selling SGBs before maturity can attract capital gains tax. Capital gains tax is applicable only on the profit earned on selling SGBs before maturity.
  • If you hold SGBs in dematerialized form, you may have to pay a nominal demat account holding fee. This fee is usually charged by depositories to maintain and manage the SGBs in demat form.
  • In case of SGBs, the interest earned on the investment is taxable as per the individual's income tax slab rate.
  • If you hold SGBs until maturity, the maturity proceeds are tax-free, and no capital gains tax is applicable.
  • SGBs also offer indexation benefits. If an investor holds SGBs for more than three years, they can claim the benefit of indexation on capital gains.
  • If you sell your SGBs on a stock exchange, securities transaction tax (STT) is also applicable. STT is a tax payable on the value of securities transacted on the stock exchange.

Conclusion

Investing in Sovereign Gold Bonds can be a great way to diversify your investment portfolio and gain exposure to the price movements of gold without having to worry about the safety and storage of physical gold. However, as with any investment, it is important to understand the tax implications associated with investing in SGBs, such as capital gains tax and demat account holding fees. By seeking the guidance of a tax expert and staying informed about the tax rules and regulations, you can make informed investment decisions and potentially maximize your returns from SGB investments.

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