loader2
Partner With Us NRI
Download iLearn App

Download the ICICIdirect iLearn app

Helping you invest with confidence

Open Free Demat Account Online with ICICIDIRECT

What Is The Lock In Period In Sovereign Gold Bond

20 Dec 2022 0 COMMENT

Introduction

The concept of lock-in period of sovereign gold bonds has to be understood at various levels. We will see these various levels of lock in during the course of this piece. The lock-in period for sovereign gold bonds begins with the first 6-month lock in cooling period during which the bond is not listed on the stock exchanges. Then there are lock-in requirements for redemption and for capital gains exemption.

The lock-in period in SGB is a five year lock in for liquidity offered by the government for the gold bonds. In addition, there is an SGB lock-in period of 8 years before the capital gains from the gold bonds can be treated as exempt from tax. Let us look at lock-ins as a concept with reference to sovereign gold bonds in much greater detail.

What is lock-in period in SGB

Lock-in period for the sovereign gold bonds or SGBs have to be understood at various levels.

a) The fist lock-in with reference to sovereign gold bonds pertains to the listing lock-in period. Once the gold bond issue is closed, there is a cooling lock-in of 6 months before that particular series of SGBs are listing on the stock exchanges. During the first six months, there is absolutely no liquidity on the sovereign gold bonds and they list only after the completion of six months. However, even after the 6 months are completed, the volumes are very thin in the SGB market and hence exit in the secondary market is hardly possible from a practical perspective.

b) The second lock-in is with reference to the short term capital gains and long term capital gains classification. Sovereign Gold Bonds (SGB) is classified as non-equity assets and hence the cut-off for long term would be 3 years. If the bonds are held for less than 3 years, (the only ways is to sell in the secondary market), then it would be short term capital gains and would be taxed at the peak rate applicable to the investor.

c) If the sovereign gold bonds are held for more than 3 years, they become long term capital gains and would then be taxed at 20% of the indexed capital gains. However, there is a further subtlety in the lock in period offered for long term gains. From the fifth year onwards, the government offers a repurchase window at the end of the fifth year, sixth year and the seventh year. During this period, the investors can redeem the bonds through this window made available to them and realize the funds. This will be treated as long term capital gains and taxed accordingly.

d) Finally, there is the full lock-in of 8 years, which is the original tenure of the sovereign gold bond. If these gold bonds are held for the full 8 years, then whatever be the quantum of capital gains made, the entire capital gains would be taxed free. However, this benefit is only available if the 8 year lock-in period is respected, not otherwise.

How can you buy these bonds? 

Sovereign gold bonds (SGBs) can be bought through any of the designated scheduled banks or even through post offices and SHCIL. Note that Payment Banks are not authorized to market sovereign gold bonds. Bonds can also be purchased on the trading platform on the NSE and the BSE. If you have an internet banking account or an internet trading account, these gold bond can also be purchased online.

Breaking lock-in period for SGB

What do we understanding by breaking the lock-in period? Here is what it means.

  • The first breaking of lock-in period arises when the bonds are sold through the secondary market. If it is sold in less than 3 years, then the consequences are that you pay a higher rate of tax since the gains will be classified as short term capital gains. In the case of non-equity assets like gold bonds, short term capital gains are taxed at the peak rate applicable to the investors. i.e. 20% or 30% as the case may be.
  • The second case of breaking is when you break 8 year lock-in period. The government of India, through the RBI, offers a buyback window wherein the investors can offer their shares for redemption at the end of the fifth, sixth and the seventh year. However, it must be noted that in this case, the gains would be treated as long term capital gains and taxed accordingly. That means, the tax has to be paid at the rate of 20% of the indexed capital gains earned by the investor.
  • If held for the full 8 year tenure, capital gains are tax free. However, note that in such cases any losses would not be available for set-off, so plan your exit accordingly by the end of the seventh year.

Conclusion

There is a cost to breaking the lock-in in the form of higher capital gains tax payable. It would make the most sense if held for 8 years and results in capital gains.