Budget 2026 has introduced a major shift in the tax treatment of the Sovereign Gold Bond (SGB) Scheme, long regarded as one of the most tax-efficient avenues for Indian investors to gain exposure to gold without the challenges of physical storage. The change has stirred widespread debate across investor and financial circles, largely because it alters the tax landscape for a segment of existing bondholders.
SGBs, issued by the Reserve Bank of India on behalf of the Government of India, have historically attracted investors not only for the fixed interest component but also for a key tax advantage. Until now, any investor who held SGBs until redemption with the RBI was eligible for full exemption from capital gains tax. This benefit applied regardless of whether the bonds were purchased during the original primary issue or later through stock exchanges in the secondary market.
Budget 2026 has narrowed this exemption. Going forward, the capital gains tax benefit at maturity will be available only to original subscribers who purchased the bonds in the primary issuance and held them continuously until redemption. Investors who acquired SGBs from the secondary market, even if they hold the bonds until maturity, will no longer enjoy this exemption.
The immediate outcome is a clear bifurcation among SGB investors. Primary subscribers who remain invested until maturity retain the full tax advantage and continue to benefit from one of the most attractive features of the scheme. Secondary market buyers, however, are now treated similarly to investors in other capital assets, with capital gains at redemption becoming taxable under prevailing rules.
Public reaction has largely reflected disappointment and confusion. Many investors have expressed concern that the investment terms have effectively been altered during the lifecycle of their holdings. Those who entered the secondary market based on the earlier tax framework feel the revision has weakened confidence in policy stability. For these investors, the original appeal of SGBs lay in the assurance that holding the bonds to maturity would result in tax-free capital appreciation, a premise that no longer holds true.
The change also has implications for market behaviour. SGBs come with an effective eight-year tenure, with limited early exit windows. Without the tax advantage for secondary buyers, the liquidity appeal of these bonds may diminish in the secondary market. As a result, investor attention is already shifting toward alternatives such as gold exchange-traded funds (ETFs), which offer greater liquidity and simpler tax structures, though without the fixed interest component that SGBs provide.
From a policy standpoint, the government’s intent may be twofold. First, it could be seeking to channel investor participation more strongly toward primary issuances rather than encouraging trading activity in the secondary market. Second, the move may aim to reduce revenue foregone through tax-free capital gains, especially as gold prices have seen substantial long-term appreciation. The decision aligns with a broader trend of tightening tax exemptions and rationalising incentives across asset classes, as seen in recent measures by the Ministry of Finance.
However, from an investor perspective, predictability and trust are central to long-term financial planning. When tax benefits are modified after investments have already been made, it can create uncertainty and erode confidence in the stability of policy commitments. This is particularly relevant for retail investors who may not actively track policy developments but rely on previously stated features of financial products.
Investors now need to reassess their SGB holdings carefully. Primary subscribers who intend to hold bonds until maturity still enjoy the most favourable tax outcome and may find little reason to alter their strategy. Secondary market buyers, on the other hand, must factor in potential capital gains tax at redemption when evaluating expected returns. For new investors, a comparative assessment between SGBs, gold ETFs, and other gold-linked instruments has become more important than ever.
The SGB scheme continues to offer advantages such as sovereign backing and periodic interest income. Yet, beyond returns, the perception of fairness and stability will play a crucial role in determining investor participation in future issuances. In investments, returns matter — but trust often matters more.
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