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Tax Implications to Buy Sovereign Gold Bonds (SGBs)

13 January 2022
5 minutes

Diversification is one of the best ways to reduce the risks of your investment portfolio. While most investors opt for stocks, mutual funds, and fixed-income investments to ensure diversification, gold investments are yet to establish themselves as efficient diversification tools.

There are several options available to investors to gain exposure to gold as an asset class like digital gold, gold ETF, physical gold, gold mutual fund, and various gold schemes like the Indian Gold Coin Scheme, Sovereign Gold Bond Scheme, and Gold Monetization Scheme.

Today, we are going to talk about Sovereign Gold Bonds and the tax implications associated with SGBs that investors must know about.

Sovereign gold bonds (SGB) hold gold in dematerialized form for investors who do not want to buy physical gold. Issued by the RBI (government), the denomination of SGB is in grams of gold. At the time of redemption, the SGB will be measured against the actual price of gold at that point in time.

There are many pros and cons of investing in SGB. These are discussed below. 

Pros 

  • Investing in SGB provides interest payouts by the government, which is 2.5% per annum, given half-yearly. 
  • Hoarding gold in physical form has always posed a threat to the investor as it can be stolen. But with SGB, which is in paper form and digitally recorded nowadays, investors are free from potential theft or loss, thus becoming one of the safest forms of investment.

Cons

  • There is a lock-in period of 8 years, in which for the first 5 years, the investor cannot redeem the bond in any condition whatsoever. But this also proves to be a benefit as the investor is saved from the volatility of the market prices.
  • As known, gold prices are always turbulent. They depend on the volatility of the international market, resulting in capital loss to the investor if the purchase price of gold is more than the redemption price. However, this risk of the capital loss is minimized by the 8 years lock-in period.

Tax Benefits:

The main implication of SGB is the tax benefits that investors enjoy from investing in them, such as:

  • TDS (Tax Deducted at Source) is charged at 1% on buying the physical form of gold for more than INR 1 lakh, but in the case of SGB, no TDS is charged on the purchase or sale or transfer, nor is the TDS applicable on the interest you receive on SGB which an investor can buy up to 4 lakhs.
  • SGB comes under capital gains, which can be either short-term or long-term. In LTCG (Long Term Capital Gains), you can transfer or sell the bonds after the 5-year term, where the tax rate applicable is 20% along with cess minus the indexation benefits. This recalculates the purchase price after the effect of inflation on the bond, which lowers your capital gains to reduce taxability on your income. If the indexation benefits are not opted for,  the 10% tax rate will be applicable.
  • Whereas in STCG (Short Term Capital Gains), when you sell or transfer the SGB before 3 years, the capital gain on the same is known as STCG, which may or may not be applicable.
  • LTCG is applicable only to individual taxpayers and not for other purchasers such as HUF or trusts.
  • If you sell the SGB after 8 years of the lock-in period, the whole capital gain (profit on an asset) will be exempted from the taxable income.

Thus, there are various tax benefits given by the government for investing in SGB. Moreover, since these investments are backed by the government, it ensures that the investor will never face capital gain loss in the market and that the price of gold remains stable in the international and national markets. The investment in SGB can be done at the highest of 4 gms per person, which will yield good interest on the investment for eight years by the government; this can be termed as an additional profit to the investor. All of this is done by the government to convince the investor to invest in SGB instead of buying physical gold, which has been proved quite successful so far. Hence, if an investor is looking for a slow, secure, and safe form of investment, investing in SGB can be a great option.

Key Takeaways 

  • SGB is a popular form of investment where gold is purchased in the form of bonds
  • The government started SGB in 2015 to attract investors towards the digital form of investment.
  • You can keep SGB as collateral against loans. 

FAQs

Q1. Who is the issuer of SGB?

A. RBI is the issuer on behalf of the Government of India.

Q2. Who is eligible to invest in Sovereign Gold Bonds?

A. Residents of India under the provisions of the Income Tax Act are eligible to invest in SGB. This includes residents such as individuals, HUF (Hindu Undivided Family), trust, etc.

Q3. Can a person invest in SGB on behalf of a minor?

A. Yes, a person can invest in SGB on behalf of a minor, provided the investor is the guardian or parent of the minor.

Q4. Why is the interest earned on SGB not subjected to TDS?

A. Under Section 193 (iv) of the Income Tax Act, interest on government securities is not subject to TDS.

Q5. Under what section are only individuals allowed taxation benefits on SGB?

A. Under Section 47 (viic) of the Income Tax Act, only individuals are exempted from taxation on capital gains.  

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