Understand before you invest: How are sovereign gold bonds taxed

The Reserve Bank of India issues sovereign gold bonds on behalf of the Indian government. The bonds can be purchased by investors in physical, digital, or dematerialized form. SGBs are a suitable choice for those who want to purchase gold only for investment purposes as they guarantee the purity of gold while protecting investors from risk.

However before investing, an investor must have a clear grasp of taxation in the case of SGBs.

The guaranteed yearly return on sovereign gold bonds is 2.5% in the form of interest. This is credited straight into the bondholder's bank account on a semi-annual basis. For tax reasons, the interest is yearly added to the taxable income and taxed according to the bondholder's tax bracket.

The bond's maturity period under the SGB plan is eight years. Although the capital gain onthe maturity amount is entirely tax-free, any sale made before to maturity is subject to capital gain taxes based on the holding period.

It is significant to highlight that bonds bought via secondary markets are also eligible for the tax exemption. When you purchase SGB via a stock exchange, the transaction is only seen as a transfer rather than a redemption, and as a result, you become the bondholder and are entitled to a tax-free sum at maturity.

The profit will be subject to capital gains tax if you sell a bond on a stock market before it matures, though. These short term capital gains will be included in your taxable income and taxed in accordance with the appropriate tax bracket for you.

Profits will be considered long-term capital gains (LTCG) if they are held for a holding period of four years or longer. These benefits are taxed at a rate of 20% with indexation benefits or 10% without them.

These bonds are appealing to long-term investors since, as previously noted, the capital gain on the maturity amount is entirely tax deductible. To apply for SGBs in the current tranche, you can go through your bank, Stock Holding Corporation of India Limited (SHCIL), the NSE and BSE stock exchanges, specified post offices, or agents.