Sovereign Gold Bond, more popularly known as SGB, is a unique and different way of taking exposure in gold without actually worrying about challenges of investing in physical gold. It offers various benefits like independent pricing, purity, safety, regular income etc. However what makes it more lucrative is the taxation benefit it offers to the investors. With the help of this article, let’s try to understand the taxation of these bonds.
1. Interest Income: SGB offers the regular interest income to the investor. Currently the rate of 2.5% p.a. is offered on half yearly frequency. As per Section 193 (iv) of Income Tax Act, 1961 no tax should be deducted on interest paid on government security. Hence the withholding tax (TDS) is not applicable on interest income. However the interest income chargeable tax as per the normal income tax slab applicable to the each bondholder.
2. Capital Income: The treatment of capital income / loss is as follows:
a. Short Term Capital Gain (STCG): Any gain earned with holding period of less than 3 years falls under the category of STCG. This is chargeable to income tax as per the normal income tax slab.
b. Long Term Capital Gain (LTCG): Any gain earned with holding period of more than 3 years is treated as long term.
The long term capital gain is chargeable to tax at flat rate of 10% in case indexation benefit is not opted for. In case the indexation benefit is availed by taxpayer, the rate of income tax is 20%. Indexation is a technique by which income payments are adjusted by means of a price index so as to maintain the purchasing power of the individual after inflation.
Long Term Capital Gain at the time of Redemption
As per Section 47(viic) of Income Tax Act, any capital gain earned on redemption of these bonds is exempt for taxation to an individual. The exemption is available only to individual taxpayer and not to other categories like HUF, trusts etc.