Sovereign Gold Bonds with Quick Tips & Comparison Table of SGB/Physical Gold & ETF

  • Blog|Income Tax|
  • 6 Min Read
  • By Taxmann
  • |
  • Last Updated on 30 December, 2021

Topics Covered under this Article are as follows:

  1. Introduction: What are Sovereign Gold Bonds?
  2. Why Sovereign Gold Bonds were Issued?
  3. GST Scare? Sovereign Gold Bonds to the Rescue!
  4. Buying the Bond: Gold Sovereign Bond Scheme
  5. Tax Advantages
    • How Redemption Helps the Taxpayers
    • How Indexation Helps the Taxpayers
    • How is there no TDS (Tax Deducted at Source)?
  6. Tax Disadvantages
    • Interest is Taxable
    • Selling in Secondary Market Invites Tax
  7. Tips
  8. Tabular Comparison of Investment in SGB/Physical Gold & ETF

1. Introduction: What are Sovereign Gold Bonds?

One man said: ‘I want to go the Bond way.”

His friend exclaimed: “What !”

The man said; “Relax, I want to buy Sovereign Gold Bonds.”

Sovereign Gold Bonds are the only gold possession, which pay you, instead of your paying for them. They are government securities denominated in grams of gold. One gram is equal to one bond. These gold bonds are now-a-days used as a substitute for holding physical gold. Those who subscribe to the bonds are required to pay the issue price in cash; the bonds will be redeemed in cash on maturity. The bond is issued by Reserve Bank of India on behalf of the Government of India from time to time. And, no physical exchange of gold would actually be made.

2. Why Sovereign Gold Bonds were Issued?

The Government of India announced the Sovereign Gold Bond Scheme, 2015, with the aim of reducing the demand for physical gold so as to reduce the outflow of foreign exchange on account of import of this precious metal.

Factors for introducing Scheme:

      • The demand for gold in India goes up in times of uncertainty or high inflation.
      • Gold demand is mostly met through country’s imports from Switzerland, Hong Kong, South Africa, Ghana, the Dominican Republic, Uzbekistan, Tanzania, Sudan, Lebanon and Surinam.
      • Years of high imports are ones of the reasons for high current account deficit which, in turn, have weakened the rupee.

Dive Deeper:
All about Sovereign Gold Bond Scheme 2020-21

3. GST Scare? Sovereign Gold Bonds to the Rescue!

Do you know the biggest advantage of Sovereign Gold Bonds ? They do not come under GST taxation. After GST entry, the Sovereign Gold Bond would be profitable, over physical gold, coins or bars.

However, in case of gold coins and bars, earlier the VAT was at 1% to 1.2%, which has now been raised to 3%.

4. Buying the Bond: Gold Sovereign Bond Scheme

You can buy as little as 1 gm. of gold under the Gold Sovereign Bond Scheme. The maximum limit is 4 kg. for an individual, now and 20 kg. for a trust. Anybody who is a resident of India can invest in the scheme. Corporates and companies, HUFs and partnership firms are all allowed to buy the bonds. PAN card details are mandatory.

There are three big plus points of Sovereign Gold Bond Scheme, compared to physical gold.

      • One can buy gold at a cheaper price, compared to market price. For example, if the price of 10 gram gold is ` 3900 in open market, the scheme may offer gold at ` 3795, only.
      • The other gain is that instead of the gold lying idle, it pays interest. The rate of interest is 2.5%, at half-yearly rests.

Though interest is taxable, there is a sovereign guarantee on the same interest from Sovereign Gold Bonds, which is a plus factor.

5. Tax Advantages

There are two major advantages of Sovereign Gold Bond Scheme:

      • Redemption is not taxed and
      • Indexation benefit is given.

To ensure that Sovereign Gold Bond Scheme scores heavily on tax front, the government has brought in two income tax amendments, which pave way for redemption and indexation measures, mentioned above.

Finance Act, 2016 has inserted a new clause, Section 47(viic) under which redemption of Sovereign Gold Bonds issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by an assessee being an individual shall not be considered as transfer. The result is that the transaction shall not be regarded as transfer for purpose of capital gains tax.

Section 48 has been amended to provide that under third proviso, benefit of indexation shall apply to long-term capital gains, arising from transfer of Sovereign Gold Bonds. Previously, it was not available to bonds and debentures, except capital indexed bonds issued by the Government. That means, that mode of computation has been altered, to give advantage to Sovereign Gold Bonds.

These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to assessment year 2017-2018 and subsequent years.

5.1 How Redemption Helps the Taxpayers?

There is no tax on the proceeds of sovereign gold bond at the time of redemption. That is, the government has exempted redemption of bonds after the maturity period and the withdrawal has become completely tax free.

After the 5th year onwards, you are eligible to redeem the Sovereign Gold Bond on 6th, 7th and 8th year (last year). Let us assume at the time of investment, the bond price is ` 3,500 and at the time of redemption, the bond price is ` 4,000. Then you will end up with a profit of ` 500. This capital gain arising due to redemption of Sovereign Gold Bond by an individual is exempt from tax. Since the bonds are tax free no liability for TDS deduction arises over the same.

However, if the Sovereign Gold Bonds are transferred before the date of Maturity, tax will be applicable. Remember, there is also a sovereign guarantee on the redemption money, which is a major advantage of sovereign gold bonds.

5.2 How Indexation Helps the Taxpayers?

If someone wants to transfer Sovereign Gold Bonds before maturity, they can get indexation benefits. That is, if you choose to sell before maturity of eight years, or after holding them for three years or more, then gains are taxed as long-term capital gains at a rate of 20%, with benefits of indexation.

If held for less than three years, gains are taxed at the tax slab of the subscriber.

Thus, you can claim indexation benefits on the long-term capital gains arising on decision to transfer the bond.

5.3 How is there no TDS (Tax Deducted at Source)?

There is no concept of TDS. Since the bonds are tax free no liability for TDS deduction at all arises over the same. Hence, it is just responsibility of investors to pay the tax as per the rules.

6. Tax Disadvantages

6.1 Interest is taxable

The interest Income is taxed, under Gold Bond Scheme. Gold bonds pay interest at the rate of 2.50% per annum to a subscriber on amount of initial investment. This interest is credited semi-annually to the bank account of the investor. But, interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (Section 43), which means that semi-annual interest income derived from Sovereign Gold Bonds will be fully taxable income for you.

This income has to be shown under the head of “Income from other sources” and you would have to pay the tax accordingly. That means, income tax would have to be given to government, just like in case of your Bank Fixed Deposits.

6.2 Selling in Secondary Market Invites Tax

This is one more way, in which taxation may hit a person. Let us assume you buy today the Sovereign Gold Bond Issue and sell it in stock exchange after a year or so. In such a situation, any profit or loss from such a transaction would be immediately considered as capital gain.

Hence, if these bonds are sold in the secondary market before maturity, there are two scenarios:

      • 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 income tax slab.
      • After 3 years-If you sell the bonds after 3 years but before maturity, the capital gain will be taxed at 20% with indexation.

7. Tips

    • A minor can apply for Sovereign Gold Bond scheme though his/her guardian.
    • Not one member, but each member of family can buy the bonds in his/her own name if they satisfy the eligibility criteria as defined.
    • You can buy every year, too. For example, an individual/trust can buy 4 Kg./20 Kg. worth of gold every year as the ceiling has been fixed on a fiscal year (April-March) basis.
    • Joint holding can be done too, in case of gold bonds.
    • Though a NRI can’t buy bonds, he can be nominee and as a result can get Sovereign Gold Bond transferred in his own name. However, there are two things, which he must keep in mind. The NRI investor, to get tax advantage will be required to hold the security till early redemption or till maturity. The interest amount and maturity proceeds of the Sovereign Gold Bonds investment will not be repatriable.
    • SGB can be gifted to a relative or friend, if they fulfil eligibility criteria. The transfer procedure is governed by the provisions of the Government Securities Act, 2006 and the Government Securities Regulations, 2007, before maturity. It shall be done by execution of an instrument of transfer, which is available with the issuing agents.

8. Tabular Comparison of Investment in SGB/Physical Gold & ETF

What happens when we invest the same amount in three different types, namely. Physical Gold, SGB and Gold ETF ? For the purpose of this comparison, let us assume the following:

      • Investment amount – ` 1,00,000
      • Investment Horizon – 1 year
      • Annual appreciation in Gold Price -10% [Assumed]
      • Average Inflation – 5% for the 5 year period [Assumed]
      • Individual tax slab – 10% [Assumed]
Horizon Items Physical Gold SGB Gold ETF
1 Year Gold Investment 1,10,000 1,10,000 1,10,000
Cost of Acquisition 1,00,000 1,00,000 1,00,000
Profit 10,000 10,000 10,000
Tax @10% 1,000 0* 1,000
Interest Income 2,500
Tax on Interest @10% 0
Total Income 10,000 12,500 10,000
Total Tax 1,000 0 1,000
Net Profit 9,000 12,500 9,000

*No tax has been calculated for SGB assuming they have been sold after completion of tenure.

Gold & Taxation

Disclaimer: The content/information published on the website is only for general information of the user and shall not be construed as legal advice. While the Taxmann has exercised reasonable efforts to ensure the veracity of information/content published, Taxmann shall be under no liability in any manner whatsoever for incorrect information, if any.

8 thoughts on “Sovereign Gold Bonds with Quick Tips & Comparison Table of SGB/Physical Gold & ETF”

  1. Nice article. Have a query. If I buy sovereign gold bond from the secondary market in Aug 2021 (originally issued in Aug 2020), whether I would be required to pay any LTCG if I held the bonds till maturity viz.: Aug 2029. Thanks

  2. In the comparison table, the tax on interest @ 10% for SGB is shown as 0 (ZERO) but I don’t think it isn’t. Please correct me.

    1. Proviso (iv) to Section 193 provides exemption from TDS under Section 193 from interest payable on Govt. Securities. As SGBs are Govt. Securities, no TDS under Section 193 shall be deducted.

  3. Listed Securities become a long-term asset in 12 months, you have mentioned it as 36 months. Can you clarify the correct treatment?

  4. In case an individual wants to become a nominee in more than one bond of 4kg would that be possible, would they receive the redemption amount in their account and if so how would they be taxed

    1. The interest received on the Gold Bond shall be taxable. The capital gains tax arising on redemption of these bonds to an individual is exempted. Further, the indexation benefits will be provided for the long-term capital gains arising to any person on transfer of bond.

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