1. Sovereign Gold Bonds (SGBs) are government securities that are a secure form of investment. These bonds are issued by the Reserve Bank of India (RBI) on behalf of the Government of India
1.1 SGBs are issued in multiple tranches throughout the year, and investors can purchase them from designated banks, post offices, and stock exchanges. The price of the bonds is linked to the prevailing market price of gold and is announced by the RBI before each tranche.
1.2 SGBs have a tenure of 8 years, with an exit option available after the fifth year on the interest payment dates, and can be sold in secondary markets.
2. In this article, an attempt has been made to explain the tax on interest income, the redemption of SGBs, and its reporting in Income Tax Returns (ITR)
3. Tax on Interest SGBs provide investors with a fixed interest rate of 2.5% per annum, on initial investment amount. This interest is credited semi-annually, and the last interest is payable to the investor on the maturity date along with the principal.
3.1 The tax liability on the interest earned will be as per the individual’s income tax slab. It is taxable under the head Income from Other Sources. TDS is not to be deducted on payment of interest on SGB as section 193 of the Income Tax Act specifically excludes tax deductions on payment of interest on Government security.
3.2 The interest received on SGB is required to be reported in Schedule OS (Other Sources) in the Income Tax Return. The taxpayer who receives interest on investment in SGB can file ITR 1/2/3/4, depending upon other eligible criteria.
4. Tax on Redemption on Maturity: The Capital gain on redemption of SGB, held till maturity period of 8 years, is exempted from Tax. The amount received on redemption is required to be reported in Schedule EI (Exempted Income) under the Heading “Other Exempt Income”.
4.1 The Path is Dashboard > Filing Return for A.Y. 2024-25 > ITR 2 > Schedules > Schedule EI> Other Exempt Income > Nature of Income > Any other.
5. Tax on Premature Redemption: Though the tenure of SGB is 8 years, premature redemption of SGB is allowed after the fifth year from the date of issue.
5.1 Capital gains will not get attracted for premature redemption of SGBs.
5.2. Statutory Provision: Section 47(vii c) of the Income-tax Act, 1961, specifically excludes redemption of SGB’ from the definition of ‘transfer’ which has the effect of exempting it from capital gains.
5.3. Section 47(vii c) does not distinguish between ‘redemption on maturity’ and premature redemption. Although the issue is debatable, it is arguable that redemption will include pre-mature redemption of SGBs by the issuer as per the terms of the issue of SGB. Hence, capital gains will not get attracted for premature redemption of SGBs as well.”
5.4. The reporting of the amount received on pre-mature redemption will be the same as indicated in Para 4 above.
6. Tax on SGBs acquired in the Secondary market but Redeemed on Maturity: Capital gains tax incurred upon redeeming SGBs is exempted for individuals regardless of whether it is acquired in the primary market or the secondary market (via the stock exchange). This means that the capital gains tax incurred upon redeeming SGBs is exempted for individuals even if it is acquired in the secondary market.
6.1. The reporting of the amount received on pre-mature redemption where SGBs acquired from the Secondary market will be the same as indicated in Para 4 above.
7. Tax on sale of SGBs on the Stock Exchange: Capital gain resulting from the sale of SGBs on the stock exchange is taxable irrespective of whether it is sold within or after 5 years of issue.
7.1. The Capital Gain on redemption or sale of SGBs is classified based on the period of holding. Thus, it would be taxed as LTCG at 20% with the benefit of indexation if held for more than 12 months and as STCG at slab rates if held for up to 12 months.
7.2. There is a difference of opinion amongst experts about the period of holding for tax purposes.
7.2.1. As per one set of experts, SGBs qualify as a loan to the Government of India, the terms for debt instruments shall apply to it. So, one needs to hold these for 36 months for them to become long-term for capital gains purposes.
7.2.2. Whereas the other set of experts is of the view that as per Clause (29A) and (42A) of Section 2 of the Income Tax Act, all listed securities [except for units of debt-oriented mutual funds] shall be classified as long-term capital assets if held for more than 12 months. Going by the definition given by the Income Tax Act, Capital Gain on sale of SGBs is considered as LTCG if held for more than 12 months.
7.2.3. Thus, LTCG on SGBs can be taxed at 20% with an indexation benefit or 10% without an indexation benefit.
8. Reporting of Capital Gain on sale of SGBs Profits arising from the sale of SGBs are capital gains and the taxpayers must report capital gains in schedule CG of ITR forms.
8.1. Capital gains on SGBs with indexation benefits must be reported in the ‘sale of other assets’ section.
8.2 The Path is: The Path is Dashboard > Filing Return for A.Y. 2024-25 > ITR 2 > Schedules > Schedule CG> Sale of other Assets.
9. The taxpayers may explore the exemption available under Section 54F of the Income-tax Act, 1961 in the case of LTCG.
10. Redemption of SGB by taxpayers other than individuals is not exempt.
Disclaimer: The article is for educational purposes only.
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Very informative
Nicely put forth both views regarding applicability of Capital under various conditions. The tax authorities should remove such conflicting section in the IT Act and avoid possibilities of notices to tax payer. Tax payers will follow Tax planning and Govt will call it tax avoidance and both west ther resources on fighting it out.
Read. Informative. Thanks.