Secondary market buyers of sovereign gold bonds to lose tax benefit

The Union budget for FY27 proposes to withdraw the capital gains tax exemption on sovereign gold bonds (SGBs) for investors who buy them from the secondary market, limiting the benefit only to the original subscribers. The move changes the post-tax returns for a large pool of investors, especially since the government has not been making fresh issuances of these bonds and most trading now happens in the secondary market.

The change effectively ends the tax-free status for secondary buyers or those who purchase these bonds from the stock exchange or from other investors after the initial allotment.

Starting 1 April 2026, the capital gains exemption at the time of redemption will be available only to investors who have bought the gold bonds directly during the primary issuance and hold them continuously until maturity.

“A primary buyer is someone who subscribes to the bond during the original RBI (Reserve Bank of India) window via banks, post offices, or online platforms. A secondary buyer picks up the bond later from the market,” explained Himank Singla, partner at SBHS & Associates.

This is a proposed amendment to section 70(1)(x) of the Income Tax Act, and it means that only the primary buyer who does not transfer the bond at any stage will continue to enjoy full exemption from capital gains tax on redemption by the RBI, Singla added.

"Exemption on capital gains on SGBs was available to both primary and secondary buyers if held till maturity. The benefit has been removed for secondary buyers," Harshal Bhuta, partner at P. R. Bhuta & Co. CAs, noted.

What it means for investors

"SGBs bought from the secondary market will be liable for capital gains tax rates. This would imply 12.5% long-term capital gains tax rate if held for more than 12 months and a slab rate if held for less than 12 months," said Balwant Jain, Mumbai-based tax and investment expert.

“Notably, the 2.5% annual interest paid on SGBs remains fully taxable for all categories of holders, as per existing laws,” added Singla.

“The government is no longer issuing SGBs, and so people are largely buying SGBs in the secondary market. Till now, there was no tax (capital gains) if the bonds were held to maturity. But given the performance of gold prices and unhedged liability that it may have created for the government, capital gains tax has been introduced for secondary buyers even if SGBs are held to maturity,” said Amit Maheshwari, managing partner with AKM Global.

This is a dampener for investors who would have bought these gold bonds in the secondary market and will now have to pay long-term capital gains at 12.5% and short-term capital gains at slab rates, Maheshwari added.

Since these bonds are redeemed at the prevailing gold prices, the relentless surge in the precious metal has pushed up payouts on sovereign gold bonds, raising fiscal concerns. Gold prices have zoomed over 100% in the last one year and 242% over the last five years.

Other investment-related changes

The budget also introduced an important change to the taxation of employer contributions to employee benefits above a threshold.

“So far, the employer’s share of contribution in excess of 12% to the provident fund was taxable. Further, the employer’s share of the total contribution towards PF, superannuation fund and the NPS in excess of ₹7.5 lakh was also taxable. This created a lot of confusion. Now the 12% limit has been deleted; in other words, it is simplified to clarify that the employer’s contribution in excess of ₹7.5 lakh will be taxable as income in the hands of the employee. This brings clarity and avoids any double taxation,” said Sonu Iyer, tax partner and national leader, people advisory services, EY India.

Changes were also made to plug a tax loophole. “Earlier, if the taxpayer could prove that equity shares or mutual fund units were bought using a loan, the interest cost could be used as a deduction against dividend income. However, the new budget proposals remove this provision,” said Nitesh Buddhadev, a Mumbai-based chartered accountant and founder of Nimit Consultancy.

The budget proposed that investors holding securities of multiple companies—and earning dividend income or interest income—will now just have to submit form 15G or form 15H to the depository, rather than to each of the companies.

Form 15H is required to be submitted by senior citizens seeking exemption on tax deduction at source (TDS) on dividend or interest income. It is a self-declaration form stating that their total income is below the taxable limit and, hence, TDS can be exempted. Form 15G is required to be submitted by non-senior citizens for the same exemption.

The budget also proposed monetizing real estate assets of public sector units through special real estate investment trusts (REITs).