Tax rules on SGB
Recently, the maturity of many Sovereign Gold Bond (SGB) series issued by the Reserve Bank of India (RBI) has been completed, and investors have got excellent returns. Some bonds have given profits of up to 325%. But it is also important to understand how this income is taxed. Many investors ignore this part and later get confused.
Got great benefits from RBI bonds
RBI issues gold bonds in different series every year. For example, SGB 2017-18 Series IV was issued on October 23, 2017 at ₹2,987 per gram. When it matured recently after 8 years, investors got a redemption price of ₹12,704 per gram, i.e. around 325% return.
Similarly, investors in SGB 2017-18 Series V got ₹11,992 per gram compared to ₹2,971, resulting in a profit of 303%. Whereas SGB 2018-19 Series II and SGB 2019-20 Series VI also gave returns of 304% and 217% respectively. Even the 2020 series gave a profit of about 166% in just 5 years. It is clear from these figures that there has been a tremendous rise in the prices of gold in the last few years. In the last five years, gold prices have increased by about 150%.
Taxation rules: where the mistake occurs
If you keep your SGB for full 8 years and redeem it on maturity directly through RBI, then you do not have to pay any tax on capital gains. That means, the profit made due to increase in the price of gold is completely tax-free. The same rule also applies to Early Redemption after 5 years, provided the redemption process is through RBI.
Tax will be charged on selling in stock exchange
But if you sell your bonds on the stock exchange, tax will be applicable. If the sale is made within 12 months, the gain will be considered short-term and will be taxed as per your income tax slab. If the sale takes place after 12 months, the gain will be considered long term and 12.5% tax (without indexation) will have to be paid. This provision has come into effect after Budget 2024.
Additionally, the 2.5% annual interest that you earn every year is always taxable as income from other sources. No TDS is deducted on it, but you are required to add it in your income tax return and pay tax.
How do sovereign gold bonds work?
SGB is actually a digital gold option issued by the government. In this, investors invest in the form of grams of gold, but there is no need to keep the actual gold. The government gives 2.5% annual interest on these bonds, which comes into your account every six months. The tenure of each bond is 8 years. However, if the investor wishes, he can redeem it earlier on the date of interest payment after 5 years. The redemption price is decided on the average market price of gold at that time.