How are Sovereign Gold Bonds (SGBs) taxed in India? 4 things to know

Sovereign gold bonds are not just like any other government bond. These are bonds backed by gold. Every unit of SGB is backed by one gram of gold. These are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. SGBs come with a coupon of 2.5% interest per annum, which is paid semi-annually. These have a maturity period of eight years but are open for redemption with RBI after the end of five years. These are also listed on the stock exchanges and can be traded on exchanges.

How Sovereign Gold Bonds taxed in India and what are the applicable taxes?

1. Short-term capital gain (STCG): – If one sells the SGBs at a profit within 3 years of purchase, then it is considered STCG and is taxable. The gain will be added to the income of the person for the year and will be taxed according to the applicable tax slab to the person. For example, if an individual’s income falls in the tax slab of 20% then 20% STCG will be charged on the profit amount.

2. Long-term capital gain (LTCG): – This tax is applicable if an investor books profit on SGBs after 3 years of purchase. This is applicable at 20% (if indexation is availed) or 10% (if indexation is not availed)

Indexation is a method used to adjust the purchase price of an investment to reflect the effect of inflation on it. It increases the buying price of the asset, resulting in lower profits.

LTCG does not apply to investors who hold the units until maturity. Gains on units held till maturity are tax-exempt.

So, if one wants to invest in gold for 3-8 years this is the option they must think of, as the gains are exempt from tax.

Adding to this, LTCG does not apply to Hindu Undivided Family and Trusts.

3. Tax on Interest: – SGB holders get an interest of 2.5% per annum on the face value of the bond. This interest amount is taxable and is added to the investor’s income and is taxed according to the applicable tax slab. Although this adds tax liability to the investor one must understand that interest on gold is never possible on physical gold, whereas you get interest coupons on SGBs so the tax on this should not concern the investors.

4. GST on stamp duty and brokerage: – Brokerage is applicable on the purchase of SGBs from the secondary markets or stock exchanges. Brokerage is charged by the broker, and the rate of brokerage can vary from broker to broker and person to person. A flat 18% Goods and Service charge is applicable on the brokerage amount. This tax is paid by the investors while buying the SGBs.

So, to conclude with the taxes on SGBs let us understand what tax benefit an investor derives from investing in SGBs instead of physical gold. The investor saves on the 3% GST on the purchase of gold, the 1% TDS which is charged if the physical gold of more than two lakhs, GST on the making charges and LTCG if held till maturity or via HUFs and Trusts.

These are the tax benefits; the investor earns an additional interest of 2.5% per annum and saves on the making charges which are applicable on physical gold.

This shows that if an investor is considering buying gold for an investment purpose, then Sovereign Gold Bonds can be considered a suitable choice.

(Author: Digital Gold expert-Mahendra Luniya, Vighnaharta Gold)

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