Taxability of Sovereign Gold Bonds under Income-tax Act

Sovereign Gold Bonds (SGB) have gained popularity as an investment option in India due to their unique features and potential returns. These bonds, issued by the Reserve Bank of India (RBI), offer an attractive alternative to holding physical gold. In this article, we delve into the tax implications and features of SGB, including how they are taxed under the Income-tax Act.

♦ What is SGB and its features

• SGB are government securities denominated in gram of gold issued by Reserve Bank of India [“RBI”] and they are substitutes for holding physical gold. 

• SGB has more advantages over physical gold on account of risk & costs associated with storage of physical gold, making charges & purity in case the physical gold is in the form of jewellery. Assurance to investors of the market value of gold at the time of maturity and periodical interest in case of SGB. 

• SGB are issued in denominations of one gram of gold and in multiples thereof. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for Individuals and HUF.

• On maturity, SGB shall be redeemed in Indian Rupees on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

• Tenure of SGB is 8 years but can redeemed / encashed after 5^th year from the date of issue.

• As per the recent notification issued by RBI in June 2023, SGB may be held by a Trust, HUFs, Charitable Institution, University or by a person resident in India, being an Individual, in his capacity as such Individual, or on behalf of minor child, or jointly with any other individual.

• Person Resident in India shall have the same meaning as defined in clause (v) of section 2 of the Foreign Exchange Management Act, 1999 (FEMA).

• Any investor can apply online for subscription of SGB on RBI Retail Direct website [https://rbiretaildirect.in/#/login/] by providing the basic details with Aadhaar authentication.

• The payment for SGB can be made in Indian Rupees through cash (upto maximum of INR 20,000], demand draft or cheque or electronic banking.

• SGB can be used as a collateral security for availing any loan. However, the loan against SGB would be subject to the decision of banks / financial institutions.

♦ Taxability of Capital Gains and Interest earned

• As per section 47(viic) of the Income-tax Act, any transfer of SGB by an Individual under the Sovereign Gold Bond Scheme, 2015, by way of redemption is not regarded as transfer.

• However, as SGB are tradable on exchanges and if it is sold in secondary market, then the same will considered as transfer and capital gains tax will be computed accordingly.

• As per 4^th proviso to section 48, in case of long-term capital gains arises on sale of SGB, benefit of indexation is available.

• SGB will be considered as long-term capital asset if it is held for more than 36 months and it is taxable at special rate of 20% u/s 112. In case, SGB is held for 36 months or less, it is considered as short-term capital asset and taxed at applicable slab rates.

• Interest earned on SGB will be taxable at applicable slab rates.

• Further, as per the commentary provided for Finance Act, 2016, SGB shall not be regarded as transfer for the purpose of section 47, if

• • The transfer is by way of be redemption at maturity
  • The transfer is by an individual

• Therefore, redemption before maturity of SGB by the original buyer or transferee will be taxable under the Act.

Further, the name of SGB is still written as Sovereign Gold Bonds, 2015 in Income-tax Act. However, as per the data available on the website of RBI, SGB’s are issued twice every year and it was first issued in FY 2015-16. Government should amend the Act by removing the year as it will create confusion in the mind of the taxpayer whether the benefit of indexation is available in their case or whether they can claim exemption for redemption on maturity by not treating it as transfer if they have purchased SGB in the series issued after the year 2015.

Conclusion

Sovereign Gold Bonds offer investors a tax-efficient way to invest in gold. While the tax treatment of redemptions is favorable, selling SGBs in the secondary market may have capital gains implications. Understanding the tax rules for SGBs can help investors make informed decisions. The clarity of provisions and the amendment of the Income-tax Act, as it pertains to SGBs, will be essential to avoid any confusion in the future.

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Disclaimer: This article serves an educational purpose and should not be considered as professional advice. Consultation with a qualified individual is recommended before making any decisions based on the content provided. The author bears no responsibility for any actions taken based on this article.