Sovereign Gold Bond: Tax Implications on SGB

In India, many households will have gold in some form or the other. This is mainly because the precious metal is an integral part of the country’s cultural heritage and roots. Moreover, gold makes for an excellent investment too! 

 

In fact, its investment value and benefits are common reasons why today’s investors are attracted towards it. But physical gold is not the only way to invest. The Government of India, with the RBI, has launched a bond scheme that enables you to invest in gold in paper form. 

 

Best of all, investing in this scheme also has tax benefits to help grow your wealth. To learn more about SGB, tax benefits, implications, and other features, read on.

The Reserve Bank of India (RBI) issues Sovereign Gold Bonds to the citizens of the country through banks and other authorised channels. The distribution takes place in parts/ phases (tranches) during a financial year. 

 

The function of this bond is similar to that of having physical gold. This means that it is prone to market fluctuations. To make investing in SGBs worthwhile, the price of the bond is marginally lower than that of the prevailing rates of the physical gold.  

 

Additionally, the bond is denoted in grams. This is to ensure that your investment is fruitful and at par with the prevailing rates of physical gold. 

Along with enjoying the same benefits of having physical gold with you, there are other benefits that you can enjoy when you invest in SGBs. These benefits include:

 

• Interest rate of 2.5% to help maximise your returns and wealth

• Digital record of the investment eliminates the risk of theft/ lost investment

• Issued by the RBI, adding a layer of security to your investment

• LTCG arising from transfer/ redemption of bond qualifies for indexation benefits, reducing tax liability

• Acceptance as collateral provides better access to credit without liquifying the investment

• No TDS applicable on the interest earned from SGBs

• LTCG (Long term capital gains) tax exemption if you invest in the bond till its maturity

SGB Tax benefits can be categorised into two sections. The first is for the interest you earn from SGBs and the second is on the LTCG earned for staying invested till maturity. Here is a detailed look into these tax benefits.

• Tax benefits on interest

Sovereign Gold Bonds are issued by the Reserve Bank of India, making them a government issued security/ investment scheme. According to section 193 of the Income Tax Act, 1961, TDS deduction is exclusively exempted when the interest earned is from a government issued scheme. 

 

As a result of this provision, you can receive the full interest amount with no deductions. This also enables you to make the most of your investment and maximise your wealth in a safe and secure way.

• Tax benefits on LTCG

LTCG are subject to taxation as per the Income Tax Act, 1961. However, there are certain exclusions that allow you to enjoy your LTCG without any tax liability. 

 

With SGBs, tax benefits for LTCG are in accordance with the section 47 (viic) of the Income Tax Act, 1961. Under this section, your long-term capital gains from Sovereign Gold Bonds are exempt from taxation if you stay invested till maturity.

 

Generally, SGBs come with a tenor of 8 years. So, if you stay invested in this instrument till the maturity period, you can enjoy capital gains with no tax liability. 

When it comes to investing in an SGB, the tax benefits are only one side of the coin. The other side is the tax implications. Understanding both these sides provides a holistic view of your returns. 

 

Here is a detailed look into the tax implications of investing in Sovereign Gold Bonds.

• Interest taxation

Although no TDS deduction on the interest is one of the SGB tax benefits, the interest amount as a whole is considered income. As such, it is subject to taxation. This is because your interest income from an SGB falls under the category of IFOS (Income From Other Sources). 

 

The taxation is dependent on the tax slab under which your total income is taxable. For example, if your total taxable income, after adding SGB interest, falls under the tax slab of 10%, then the whole taxable income is taxed at 10%. 

• STCG taxation

STCG, or short-term capital gains, are the gains that you earn when you sell your investment at a profit within a certain period. For SGBs, this period is 3 years. This means that if you sell your bond within 3 years of purchase and have made a gain (profit), then it is taxable at the slab rate of your total taxable income. 

 

To determine the applicable tax slab, your STCG and all other applicable incomes are added to get the net taxable income. 

• LTCG taxation

LTCG are the gains that you earn when you sell your capital assets after the STCG limit but before maturity. For SGBs, this is after 3 years but before 8 years as the maturity period is 8 years. 

 

This means that if you sell your bond after 3 years but before maturity and see gains (profit), then it is taxable at a flat rate of 20% alongside indexation benefits. However, if you have not availed indexation, then the tax rate reduces to 10%.

• GST on brokerage 

Unlike on physical gold, the GST on SGB is only applicable to the brokerage you pay. While investing, you will have to pay GST at the flat rate of 18% on the brokerage amount. 

 

Investing in any instrument is a decision that you should make only after understanding its current and future impact on your finances. A good way of doing this is by considering the taxation that comes into effect while investing and redeeming the investment. 

 

However, tax benefits on investments in SGBs can change based on the government’s policies or regulations. So, make sure you take all the Sovereign Gold Bond tax benefits and implications into consideration before investing.