Taxation of Sovereign Gold Bond 2023

What is the taxation of sovereign gold bonds or SGB? Nowadays Sovereign Gold Bond Scheme or SGB turned one of the popular ways to invest in Gold. However, many are unaware of the Taxation of the Sovereign Gold Bond Scheme. Hence, let me explain to you in detail about this.

This Gold Bonds scheme was launched in November 2015. The government launched this scheme to reduce the demand for physical gold. Indians buy around 300 tons of gold every year. This is to be imported from outside countries. Let us see the silent features of this scheme.

The Bonds shall be issued in the form of Government of India Stock in accordance with section 3 of the Government Securities Act, 2006. The investors will be issued a Holding Certificate (Form C). The Bonds shall be eligible for conversion into de-mat form.

Features of the Sovereign Gold Bond Scheme (SGB)

Let me explain this with the below image.

# Who can invest?

Resident Indian entities including individuals (in his capacity as such individual, or on behalf of a minor child, or jointly with any other individual.), HUFs, Trusts, Universities, and Charitable Institutions can invest in such bonds.

Hence, NRIs are not allowed to participate in the Sovereign Gold Bond Scheme.

# Tenure of the Bond

The tenor of the Bond will be for a period of 8 years with an exit option from the 5th year to be exercised on the interest payment dates.

Hence, after the 5 years onward you can redeem it on the 6th, 7th or at maturity of the 8th year. Before that, you can’t redeem.

RBI/depository shall inform the investor of the date of maturity of the Bond one month before its maturity.

# Minimum and Maximum investment

You have to purchase a minimum of 1 gram of gold. The maximum amount subscribed by an entity will not be more than 4 kgs per person per fiscal year (April-March) for individuals and HUF and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).

In the case of joint holding, the investment limit of 4 kgs will be applied to the first applicant only. The annual ceiling will include bonds subscribed under different tranches during initial issuance by the Government and those purchased from the secondary market.

The ceiling on investment will not include the holdings as collateral by banks and other Financial Institutions.

#Interest Rate

You will receive a fixed interest rate of 2.50% per annum payable semi-annually on the nominal value. Such interest rate is on the value of money you invested initially but not on the bond value as on the date of interest payout.

Interest will be credited directly to your account which you shared while investing.

# Issue Price

The nominal value of the bond is based on the simple average closing price [published by the India Bullion and Jewellers Association Ltd (IBJA)] for gold of 999 purity of the last three business days of the week preceding the subscription period.

# Payment Option

Payment shall be accepted in Indian Rupees through cash up to a maximum of Rs.20,000/- or Demand Drafts or Cheque or Electronic banking. Where payment is made through cheque or demand draft, the same shall be drawn in favor of receiving an office.

# Issuance Form

The Gold bonds will be issued as Government of India Stock under GS Act, 2006. The investors will be issued a Holding Certificate for the same. The Bonds are eligible for conversion into Demat form.

# Where to buy Sovereign Gold Bond Scheme?

Bonds will be sold through banks, Stock Holding Corporation of India Limited (SHCIL), designated Post Offices (as may be notified), and recognized stock exchanges viz., National Stock Exchange of India Limited and Bombay Stock Exchange, either directly or through agents.

# Loan against Bonds

The Bonds may be used as collateral for loans. The Loan to Value ratio will be as applicable to ordinary gold loans mandated by the RBI from time to time. The lien on the Bonds shall be marked in the depository by the authorized banks. The loan against SGBs would be subject to the decision of the lending bank/institution, and cannot be inferred as a matter of right by the SGB holder.

# Liquidity of the Bond

As I pointed out above, after 5th year onwards you can redeem the bond in the 6th or 7th year. However, the bond is available to sell in the secondary market (stock exchange) on a date as notified by the RBI.

Hence, you have two options. Either you can redeem it in the 6th or 7th year or sell it secondary market after the notification of RBI.

Do remember that the redemption price will be in Indian Rupees based on the previous week’s (Monday-Friday) simple average of the closing price of gold of 999 purity published by IBJA.

# Nomination

You can nominate or change the nominee at any point of time by using Form D and Form E.  An individual Non – resident Indian may get the security transferred in his name on account of his being a nominee of a deceased investor provided that:

1. the Non-Resident investor shall need to hold the security till early redemption or till maturity; and
2. the interest and maturity proceeds of the investment shall not be repatriable.

# Transferability

The Bonds shall be transferable by execution of an Instrument of transfer as in Form ‘F’, in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulations, 2007, published in part 6, Section 4 of the Gazette of India dated December 1, 2007.

# Redemption

As I explained above, you have an option to redeem only on the 6th, 7th, and 8th years (automatic and end of bond tenure). Hence, there are two methods one can redeem Sovereign Gold Bonds. Explaining both as below.

# At the maturity of the 8th year-The investor will be informed one month before maturity regarding the ensuing maturity of the bond. On the completion of the 8th year, both interest and redemption proceeds will be credited to the bank account provided by the customer at the time of buying the bond.

In case there are changes in any details, such as account number, email ids, then the investor must intimate the bank/SHCIL/PO promptly.

# Redemption before maturity-If you planned to redeem before maturity i.e 8th year, then you can exercise this option in the 6th or 7th year.

You have to approach the concerned bank/SHCIL offices/Post Office/agent 30 days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.

Taxation of Sovereign Gold Bond 2023

Let us now move on to the important aspect of this post i.e Taxation of the Sovereign Gold Bond Scheme.

There are three aspects of the taxation of the Sovereign Gold Bond Scheme. Let us look into it 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–

As I said above, 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.

Remember capital gain arising due to the REDEMPTION at 6th, 7th, and 8th year is exempted from tax. The same is mentioned by RBI also in it’s FAQs as “The capital gains tax arising on redemption of SGB to an individual has been exempted.”.

The exemption is available only to individual taxpayers and not to other categories like HUF, trusts, etc.

3) Selling in the secondary market of Stock Exchange–

There is one more taxation that may arise. Let us assume you buy today 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 (Short Term Capital Gain or STCG)-If you sell these 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 (Long Term Capital Gain or LTCG)-If you sell the bonds after 3 years but before maturity, then such capital gain will be taxed at 20% with indexation. However, if you are not availing of the indexation benefit, then LTCG will be taxed at a flat rate of 10%.

There is no concept of TDS. Hence, it is the responsibility of investors to pay the tax as per the rules mentioned above.

Now many get confused between the concept of REDEMPTION and transfer of bond. I am clearing it that if you REDEEM on 6th,7th and 8th year (last year), then the tax is exempted (Also this exemption is available only to individual taxpayers and not to other categories like HUF, trusts, etc.).

However, if someone is TRANSFERRING the bonds, then capital gain taxation will come into the picture.

For many, there is confusion in this regard. Suppose Mr.A purchased the bond at the time of issue and sold it in the secondary market to Mr.B after a year or so, then Mr.A has to bear the tax as per the Capital Gain Tax rules explained.

However, for Mr.B who purchased it in the secondary market and redeemed the bond at maturity, then for him the tax is exempted as he is REDEEMING but not TRANSFERRING. However, if Mr.B transferred to Mr.C by selling in the secondary market, then Mr.B has to bear the capital gain tax as explained above.

The same is clearly mentioned in RBI’s FAQs also as “interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961). The capital gains tax arising on redemption of SGB to an individual has been exempted. The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.”. Hence, I hope there is no confusion in this regard.

Conclusion – Understand the Taxation of Sovereign Gold bonds properly before jumping into blind investing. Gold is fine but understanding the Taxation of Sovereign Gold Bond 2023 will give a clarity about whether you can go ahead or not for buying such bonds.