Is SGB or Sovereign Gold Bond Tax-Free if bought from a secondary market? Will I get interest if I buy Sovereign Gold Bond from the secondary market?
The above two questions are the biggest concerns for those SGB investors especially if earlier SGBs are available at a discounted price than the current issue in the secondary market. Let us try to address this in this post.
Let us take an example. The issue price for the latest SGB (“Sovereign Gold Bond Scheme 2023-24 Series 3 – Should You Buy?” is Rs.6,199 and if you buy it online, then the price is Rs.6,149. However, if you look at the latest earlier issue “Sovereign Gold Bond Scheme 2023-24 Series 2 – Should You Buy?“, then it is trading currently at Rs.6,100 (NSE Data). So the Oct 2023 SGB is available at almost around Rs.100 discount if you compare the December 2023 SGB.
However, if someone buys the SGB from a secondary market, then they have two big concerns. Let us try to address both in this post.
# Will I get interest if I buy Sovereign Gold Bond from the secondary market?
Yes, if you buy Sovereign Gold Bond from the secondary market, then you will get the interest as usual. However, the 2.5% interest will be on the original issued price of SGB but not at your purchased price. Suppose the SGB was issued at say Rs.5,000 and now if you are buying it at Rs.6,000, then you will get the 2.5% interest on Rs.5,000 but not on Rs.6,000. The same applies even if the current price goes down than the issue price.
Take for the example of the November 2023 issue Vs the December 2023 issue. The issue price of November 2023 was Rs.5,873 (online). Hence, even if it is available currently at Rs.6,100, you will get 2.5% interest on Rs.5,873 but not on Rs.6,100 (interest of Rs.146.82 per year). However, if you buy the December 2023 issue, the price is Rs.6,149 (online). Hence, the interest you will earn is Rs.153.72 per unit per year.
By looking at the price, don’t assume that the interest you earn in the future is based on your purchase price. However, to understand your interest earning, you have to look for the issue price rather than the current market price.
Also, 2.5% interest is per year but payable once in half a year. This half-year calculation is not based on when you purchased. Instead, it is based on the original issued date of the bond.
# Is Sovereign Gold Bond Tax-Free if bought from secondary market?
Let us now try to address this question “Is Sovereign Gold Bond Tax-Free if bought from secondary market?”. Before directly answering this question, let us try to understand the taxation of Sovereign Gold Bond in totality.
There are three aspects of taxation. Let us see one by one.
1) Interest Income-The semi-annual interest income will be taxable income for you. Hence, For someone in the 10%, 20%, or 30% tax bracket, the post-tax return comes to 2.25%, 2%, and 1.75% respectively. This income you have to show under the head of “Income from Other Sources” and have to pay the tax accordingly (exactly like your Bank FDs).
2) Redemption of Bond– After the 5th year onward you are eligible to redeem it on the 6th,7th, and 8th year (last year). Let us assume at the time of investment, the bond price is Rs.2,500 and at the time of redemption, the bond price is Rs.3,000. Then you will end up with a profit of Rs.500. Such capital gain arising due to redemption by an individual is exempted from tax.
3) Selling in the secondary market of the Stock Exchange-There is one more taxation that may arise. Let us assume you buy today the Sovereign Gold Bond Scheme 2023-24 Series I and sell it on the stock exchange after a year or so. In such a situation, any profit or loss from such a transaction will be considered as a capital gain.
Hence, if these bonds are sold in the secondary market before maturity, then there are two possibilities.
# Before 3 years-If you sell the bonds within three years and if there is any capital gain, such capital gain will be taxed as per your tax slab.
# After 3 years – If you sell the bonds after 3 years but before maturity, then such capital gain will be taxed at 20% with indexation.
There is no concept of TDS. Hence, it is the responsibility of investors to pay the tax as per the rules mentioned above.
It is clear from the above rules that IF YOU SELL SOVEREIGN GOLD BOND IN THE SECONDARY MARKET, THEN AS PER THE APPLICABLE ABOVE MENTIONED CAPITAL GAIN RULES, YOU HAVE TO PAY THE TAX.
HOWEVER, IF YOU BUY SOVEREIGN GOLD BOND FROM THE SECONDARY MARKET BUT INSTEAD OF SELLING IN THE SECONDARY MARKET, YOU ARE REDEEMING AT THE 6TH, 7TH, OR 8TH YEAR OF ISSUED PRICE, THEN IT IS TAX FREE FOR YOU (No matter whether you purchased it at the time of issue or from the secondary market).
I hope I have cleared the major doubts of those who wish to buy sovereign gold bonds from the secondary market.
Note- Read all Gold-related articles at “Gold“.