What is the tax treatment for sovereign gold bonds? MintGenie explains

Even though the interest accrued on SGBs is subject to taxation, the capital gains exemption after eight years, coupled with the potential for long-term capital gains featuring indexation benefits, positions SGBs as a tax-efficient alternative when contrasted with other gold investments.

Abeer Ray
First Published13 Dec 2023, 03:18 PM IST
How are SGB investments taxed?
How are SGB investments taxed?

The upcoming installment of sovereign gold bonds (SGBs) is set to open for subscription this month. The subscription period for Series III in the 2023–24 cycle is slated for December 18–22, 2023, with Series IV scheduled for February 12–16, 2024, according to an announcement from the Ministry of Finance.

The release added, “The price of SGB will be fixed in Indian rupees based on a simple average closing price of gold of 999 purity, published by the India Bullion and Jewellers Association Limited (IBJA) for the last three working days of the week preceding the subscription period.”

An escalating number of investors are showing a growing preference for investing in SGBs as a means of allocating funds to gold compared to alternative options of investing in gold. The distinctive feature of SGBs is the additional 2.5 per cent per annum interest, which complements the potential gains from the upward movement in gold prices.

The recent surge in gold’s popularity and price can be attributed significantly to inflation. Unlike currencies, which central banks can print at will, gold possesses a finite supply. This characteristic renders it a valuable asset during inflationary periods, as its worth typically rises in tandem with the prices of goods and services. 

Furthermore, the yellow metal has an enduring history of maintaining its value. This makes it a secure haven for investors aiming to safeguard their purchasing power amid economic uncertainties. As paper currencies face devaluation due to inflation, investors seek refuge in gold as a hedge. This trend is particularly pronounced in nations experiencing high inflation rates.

Why are people rushing to invest in gold?

Recent global events, such as the ongoing conflict in Ukraine and the recent Israel-Palestine situation, have heightened the demand for gold as a safe-haven asset. In a scenario where interest rates are at historic lows, investors are seeking alternative avenues for returns, rendering gold more appealing. Being a non-correlated asset, gold does not move in tandem with traditional asset classes like stocks and bonds. This unique characteristic makes it a valuable instrument for diversifying portfolios and mitigating overall risk.

The potential price appreciation in gold remains consistent across various investment avenues; however, SGBs present several advantages over alternative choices. The benefits of choosing SGBs over other gold investment options:

Interest payment: SGBs offer a fixed annual interest rate of 2.5 per cent, paid semi-annually. This ensures a guaranteed return on your investment, irrespective of gold price fluctuations.

Safety and security: Issued by the government of India, SGBs stand out as one of the safest investment choices. Concerns related to storage risks associated with physical gold are eliminated.

No storage costs: Holding SGBs does not entail any storage costs, unlike physical gold. These bonds are maintained in demat form, akin to stocks and bonds.

Liquidity: The SGBs can be traded on stock exchanges, providing a level of liquidity not typically associated with physical gold investments.

Making charges: Investing in SGBs exempts you from incurring any making charges, a cost often associated with physical gold.

Loan facility: SGBs offer the flexibility to avail loans against them, providing an additional avenue for financial support.

Though the aforementioned advantages are noteworthy, long-term investors considering SGB investments also pay close attention to the added benefit of tax efficiency. Compared to the majority of other gold investment options, SGB stands out as a more efficient method. The annual interest of 2.5 per cent is subject to taxation at your marginal slab rate, typically around 30 per cent, inclusive of surcharge and cess, for most investors.

Despite potential grievances from investors about the tax implications on the interest amount, it’s essential to remember that the interest, even after taxation, is an additional bonus as it complements the price movement of gold. Furthermore, if you retain your SGB investments until maturity, they are exempt from taxes. This implies that while you capitalize on the consistent increase in gold prices, you are not liable to pay taxes on the gains.

Regardless of whether you acquire SGBs in the primary market or the secondary market (via the stock exchange), the tax treatment for these investments remains consistent. This means that the capital gains tax incurred upon redeeming SGBs is exempted for individuals.

When are your gains taxed then?

The amount of tax you incur is contingent on your holding period. If you intend to sell your SGBs in the secondary market after holding them for one year, the tax rate is 20 per cent, along with a surcharge and cess. With the advantage of indexation, the effective tax rate will be notably lower than 20 per cent. Yet, if the holding period is less than one year, the sale will incur short-term capital gains tax at your applicable marginal slab rate.

Numerous investors aim to divest their SGB investments after the stipulated five-year lock-in period. Doing so is equivalent to liquidating the investments before the eight-year mark, meaning that even after the five-year lock-in, the proceeds from the sale of SGBs become subject to taxation.

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First Published:13 Dec 2023, 03:18 PM IST
HomeMoneyPersonal FinanceWhat is the tax treatment for sovereign gold bonds? MintGenie explains

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