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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.

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What are Sovereign Gold Bonds?

In India, gold has more religious and cultural significance as opposed to its investment value. While buying physical gold was the traditional way to gain exposure to this asset class, over the last two decades, several newer forms of instruments have been launched to allow investors to invest in the precious yellow metal.

In November 2015, the Government of India introduced a gold scheme called the Sovereign Gold Bond Scheme. Under this Scheme, the Reserve Bank of India (RBI) issues Sovereign Gold Bonds that are government securities denominated in grams of gold. This allows people to invest in gold without having to worry about the safekeeping of the physical metal.

The bonds are issued in multiples of one gram of gold. The minimum investment is one gram and the maximum is 4kg for individuals and HUFs, and 20kg for trusts and other entities as specified by the government. Further, these bonds are issued for a tenure of 8 years. Premature withdrawal is permitted only after the completion of 5 years of staying invested. Further, investors can sell the bonds in the secondary market at the existing market price of gold.

Tax implications of Buying Sovereign Gold Bonds

Before we look at the tax implications, let’s take a quick look at the returns that investors can get by buying Sovereign Gold Bonds.

1. Returns on Sovereign Gold Bonds

There are two types of returns offered by Sovereign Gold Bonds:

  1. Interest Income – These bonds pay interest twice a year at the rate of 2.50% per annum on the investment amount.
  2. Capital Gain – Sovereign Gold Bonds are issued at the prevalent market rates of gold at the time of purchase. When the investor redeems the bonds (on maturity or premature), the selling price is determined by the existing market price of gold on the date of redemption. If the gold price has increased from the date of purchase, then the investor earns capital gains.

Here is the tax treatment:

Interest Income

The interest received on the Sovereign Gold Bond holdings is taxable as per the Income Tax Act, 1961. The interest earned during a financial year is clubbed with the investor’s annual income and taxed according to the applicable income tax slabs. Investors must remember that the interest paid by these bonds does not attract any TDS (tax deducted at source).

Example:

An investor purchases gold bonds for Rs.2 lakh in March 2020. According to his annual income, he falls in the 20% tax bracket. Hence, the tax liability would be as follows:

  • Interest earned in the FY2020-21 on the SGB investment = 200000*2.5/100 = Rs.5000.
  • Tax liability @20% (applicable tax slab) = 5000*20/100 = Rs.1000.

Capital Gains

To understand the tax implications of capital gains, let’s look at two scenarios:

  1. SGBs held till maturity (8 years)
  2. SGBs redeemed prematurely

Tax implications for SGBs Held till Maturity (8 years)

Sovereign Gold Bonds offer a unique tax benefit that is not available with other instruments like gold mutual funds and gold ETFs. If an investor holds the bond until maturity (8 years), then the capital gains earned do not attract any capital gains tax. This is an initiative taken by the government of India to help people move from physical to non-physical gold. In simpler terms, if an SGB is held until maturity, then the capital gains tax is not applicable.

Tax implications for SGBs Redeemed Prematurely

If you want to redeem your investments before maturity, then you have two options:

Redeem the bond after the fifth year of issue on the coupon payment dates

In case of early redemption/encashment of the bond after the fifth year, the capital gains will be taxed. The tax rates applicable will be for long-term capital gains (LTCG) at 20% with added cess and indexation benefits.

Sell the bonds on the secondary market (if they are listed)

SGBs can be traded on a stock exchange if they are listed from the date notified by the RBI. 

STCG

If the bond is sold within three years from the purchase date, then the capital gains are taxed as short-term capital gains (STCG). These gains will be added to the investor’s annual income and taxed as per the applicable tax slabs.

LTCG

If the bond is sold after three years from the date of purchase of the SGB, then the capital gains are taxed as long-term capital gains (LTCG). These gains are taxed at the rate of 20% with added cess and indexation benefits.

Summing Up

Investing in SGBs offers a range of benefits to investors. Since they are backed by the Government of India, they are one of the safest forms of investment in the country. While the risks pertaining to the volatility in gold prices and demand are present, Government backing ensures that there is no risk of default in repayment. SGBs make gold investments hassle-free and offer an opportunity to earn regular interest plus capital appreciation. If you hold on to the investment until maturity, then you have zero tax liability on capital gains too. All these features make SGBs a great option to diversify your portfolio and gain exposure to gold as an asset class.

Happy Investing!

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