What are SGBs and how are they taxed?

Income Tax Income from Capital Gains
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Gold has always been considered a valuable asset and many people invest in gold because it is seen as a hedge against inflation. In times of economic uncertainty or rising prices, gold has historically retained its value and even appreciated, making it an attractive option for investors.

With rising digitalisation, people have shifted to alternate ways to invest in gold and one such option is SGBs, or Sovereign Gold Bonds.

What are Sovereign Gold Bonds?

Firstly, a bond represents a loan that an investor gives to a borrower. Usually, the borrower is the government or a corporate entity and we could be the investors.

Now, SGB is one such bond issued by the Government of India, where gold is the underlying asset which means the government raises funds by offering gold as security.

These bonds are directly linked to the actual price of gold and hence, the amount you invest appreciates as the gold prices rise.

Here are some key features:

  • SGBs have a maturity period of 8 years and offer an annual interest of 2.5% which is paid semi-annually.
  • They are denoted in grams of gold (1 unit = 1 gram) and the minimum investment amount is equivalent to the price of 1 gram of gold. The maximum limit is 4kg for individuals.
  • SGBs are issued by the RBI in tranches which is a time frame of 4-5 days when you can buy SGBs. The next tranche will be open from February 12 to February 16, 2024.
  • A pre-mature withdrawal is also allowed after 5 years.
  • Once issued, they can be traded in the secondary markets as well.

Here’s a video for you!

Who can invest in SGBs?

Any Indian resident, HUFs, trusts, universities and even charitable institutions can invest in SGBs. However, NRIs are not allowed to buy SGBs.

Is a demat account mandatory?

No, it is not mandatory to have a demat account to invest in SGBs. You can buy them via banks and some specified post offices and entities.

However, as SGBs are also traded in the stock exchange, if you want to buy/sell SGB from the secondary markets, having a demat becomes mandatory.

How are SGBs taxed?

There can be two scenarios, one, where you hold the bonds till maturity (8 years) and redeem them.

Two, you sell the bonds on the stock exchange before maturity. The tax implications would be different in both situations.

  1. If you hold the bonds till maturity, the capital gains will be completely tax-exempt. That means you do not have to pay any taxes on the capital gains from these bonds.

  2. If you sell them in secondary markets, the gains will be taxable as short-term and long-term capital gains based on the holding period.

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Finally, the 2.5% interest income that you receive will be taxable as ‘income from other sources’ as per your applicable slab rate.

Ask your queries below!

2 Likes
2

Thanks for this article.

With regards to tax, how about the situation where it’s bought in the secondary market, say we buy this in the fourth year and held till maturity (held for four years).

1 Like
3

Yes I have the same query.

  1. Lets say investor misses out to buy in primary market and buys it in secondary market once it is listed. What will be the taxation if held till maturity.

  2. Indexation benefit is still available for SGB for LTCG (sold before maturity)?
    It got removed from all debt products last year?

1 Like
4

Buying doesn’t affect taxation. Only selling/redemption/maturity decides the taxation. Buying from secondary market anytime and holding till maturity is tax free.

5

Hey @Gowtham @Saurabh_Gupta1,

If you buy SGBs from the secondary market and hold them till maturity, the capital gains will be exempt from taxes.

Moreover, yes indexation benefit is available on SGB.

Hope this helps!

1 Like
6

Hello @TeamQuicko,

I have a few queries on SGB taxation.

  1. What is the capital gains tax structure (percentages and duration) for SGBs? The debt mutual fund taxation is now 30% irrespective of the holding duration. Does the same apply to SGBs as well?
  2. What is the capital gains tax structure (percentages and duration) for SGBs purchased from the secondary market? Let us say an investor purchases an SGB that has 4 years to go for maturity and holds it till maturity. What will be the tax liability in such a case? What if the same SGB has less than 3 years (say 1 year) to go for maturity?

Thanks,
Vivek R Shenoy

7

Hey @VRS1995,

With regard to your queries,

Hope this carifies!

1 Like
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Why is Gov. (via RBI) issuing SGBs apart from the regular bonds?

(I understand this isn’t tax related, but I’ll be glad if you guys can answer this. :slightly_smiling_face:)

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Hey @Augustine_Charly ,

Normally, the SGBs are issued by RBI and guaranteed by government. This is the only form of gold that pays interest. Issuing SGBs not only bring down the demand of physical gold but also track import-export activities. There may be transparent and fair pricing of gold as it is now regulated by RBI.

Unlike physical gold, SGBs are free from theft, risk and holding charges as it is fully backed by Indian government. Black money also plays important role to issue gold bond.

Here you can read the below article for more understanding about SGBs:

I hope, it helps! :slightly_smiling_face:

10

Hi,

I wanted to know the principle on which the 2.5% interest is applied.

a) interest is applied on the initial investment. E.g. bonds is issued at 3,000 per unit, interest is applied on 3,000 for the 8 year life of the bond ?

b) interest is applied based on the average LTP of gold when the interest is to be paid. E.g. bond issues at 3,000 per unit, gold price increases to 4,000 per unit. 2.5% is calculated on 4,000 as that is the average current price ?

Please do let me know which of the two scenarios is correct.

Thank you

11

Hey @Droid_Droid ,

The interest on Sovereign Gold Bonds (SGBs) at 2.5% p.a is calculated on the initial amount of investment and paid semi annually.

Out of the two scenarios that you presented, the first one is correct.

You can refer the RBI FAQ’s on Sovereign Gold Bonds in the below link. Please refer point number 14 for your query.

https://m.rbi.org.in/scripts/FAQView.aspx?Id=109

Hope it helps!

12

Hi Team,

So please guide for tax treatment in following case:

suppose someone bought SGBs today from secondary market and after 4 years they used the voluntary redemption window and redeemed the SGB from RBI. than what is the tax liability with respect to the capital gain that is earned? will request if can reply urgently.

13

Hey, transfer of SGB issued by RBI under Sovereign Gold Bond scheme 2015, by way of redemption by an individual shall be tax exempt.

14

If I held SGB till matutity, How do I show capital gain in itr 2 as it is non taxable?

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Hi @Khyati_Gupta

When you hold Sovereign Gold Bonds (SGB) till maturity, the capital gains you earn from their redemption are considered exempt from tax. You need to report this under exempt income in your ITR.

On Quicko, here’s how you can report it as exempt income under the “Income from Other Sources” (IFOS) section.

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do SGB has indexation benefits ?
do gold ETFs also has indexation benefits ?
@Sakshi_Shah1
@Muskan_Balar
@Riya_Jain

17

Hey @HIREiN,

Yes, on Gold ETFs as well as SGBs, you can claim indexation benefits.

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Sovereign Gold Bonds (SGBs) are government-issued bonds backed by gold, offering investors an opportunity to invest in gold without physical ownership. With a maturity period of 8 years and an annual interest of 2.5%, they are a tax-efficient investment option open to Indian residents, HUFs, trusts, and institutions, traded in tranches and secondary markets. While a demat account isn’t mandatory for purchase, it’s required for secondary market trading, with tax exemptions on capital gains if held till maturity.

1 Like
19

Hey!

What is the holding period for Sovereign Gold Bonds to determine capital gains? I’ve noticed conflicting information, with some platforms stating a 3-year holding period for Long-Term Capital Gains (LTCG), while others suggest a 1-year holding period. Could you please clarify the correct duration?

20

Hey @nithesh_nahar,

There is no clarification on this from the RBI’s end. However, as SGBs are considered listed securities, the holding period must be considered as 12 months for long-term capital gains.