Sovereign Gold Bond (SGB) : Tax Benefits

Gold has always been a preferred investment avenue for Indians due to its stability during market distress. However, physical gold has storage and security costs since it’s prone to theft. Moreover, the returns on gold reduce when purchased as jewellery due to making charges. Further, most of the Indian demand for gold is met through imports. Increasing demand for gold, therefore, leads to a widening trade deficit. This, in turn, hurts the value of the Indian rupee.
So, the government of India introduced Sovereign Gold Bonds to counter these drawbacks. They offer exposure to gold while providing tax benefits. They eliminate any making and wastage charges, leading to higher real rates of return. These bonds can be a diversification tool if you are a risk-averse investor. Continue reading to learn in detail about SGB tax benefits.

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are government securities whose value is denominated in multiples of grams of gold. They were launched to replace the dependence on physical gold. SGBs are issued by the RBI on behalf of the Government of India. They offer you exposure to gold for investment without having to hold physical gold. Some of the defining characteristics of a Sovereign Gold bond are: 

• SGBs, like any other bonds, pay periodic interest. The interest rate paid on an SGB is 2.5% annually, paid twice a year. 
• The tenure of the bond is 8 years. However, you can redeem the bond anytime after 5 years. You can also sell in the secondary market.
• Indian residents can purchase SGBs. The eligible people for SGB investments include:
  • Individuals
  • Trusts
  • Universities
  • HUFs
  • Charitable Institutions
• In case the residential status changes from resident to a non-resident, the investor can continue to hold the SGB till maturity/early redemption.
• You can invest in a minimum of an SGB worth 1 gram of gold, and a maximum of 4 Kg of gold if you are an individual investor or a Hindu Undivided Family. The maximum limit is 20 kg for trusts and other entities as specified by the government. 
• You can buy and sell SGBs through banks, recognised stock exchanges or their agents or in secondary market
• There are various tax benefits to the gains on SGBs, which are discussed in the next section

How are SGBs Taxed

The SGB taxation on capital gains can be categorised into:

SGB Taxation on Interest Income

The interest income from sovereign gold bonds is taxable per the Income Tax Act of 1961 provisions. The interest income is added to your total income, and the tax is charged per your applicable tax slab.

SGB Taxation on Capital Gains

Capital gains refer to the gains you earn due to appreciation in the underlying asset’s price. For e.g., if you purchased gold at the price of ₹45,000 per 10 grams and now the price is ₹63,000/-, then your capital gains are ₹63000 – ₹45000 = ₹18000/-.
There is an exemption from paying Capital Gains Tax in case you redeem the SGB with RBI (on behalf of the government)

In case of redemption before maturity:

Short-term Capital Gains Tax: 

If you sell the bond before the completion of 36 months of investment, your gains will be charged as short-term capital gains tax. The STCG charged to you will be the same as the income tax slab applicable to your income.

Long-term Capital Gains Tax

If you sell the SGB after 36 months, you are taxed as per the Long Term Capital Gains(LTCG) tax. The LTCG on SGB is charged at 10% without indexation benefits or 20% with indexation benefits. You can choose the lower one. Indexation means that the real capital gains are calculated after accounting for inflation in the purchased price of the bond.

SGB Tax Benefits

As discussed above, there are various tax benefits to investing in SGBs:

1. No TDS is deducted, or GST charged on the purchase or redemption of SGBs.
2. The capital gains on redemption of the bonds at maturity are completely exempted from income tax.
3. The long-term capital gains, before maturity, can be paid after availing of the indexation benefits.

Benefits of investing in SGB

The benefits of investing in a Sovereign Gold Bond are:

1. You can invest in gold without making arrangements for its secure storage. Risks such as theft and loss are eliminated when you invest in SGBs instead of physical gold.
2. There are no making charges involved if you invest in gold bonds.
3. You may not realise much capital gains on gold, but investing in SGBs gives you an assured interest payment every 6 months.
4. SGBs can be used as collateral to avail loans.
5. You also have the option of premature redemption in case of an emergency or if you anticipate a price drop in future. Additionally, you can sell in the secondary market as well.

Disadvantages of investing in SGB

Despite the many advantages, there are some disadvantages to investing in SGBs:

1. Since the SGBs are valued in terms of the prices of gold, there is a possibility that the gold prices do not increase in line with the other market-linked instruments of investment. In such a scenario, your returns might be lower than expected. 
2. The maturity period of 8 years could be too long for some investors seeking a shorter investment horizon. However, one call sells in the secondary market.
3. You can buy SGBs only in tranches, as declared by the RBI. However, one can purchase it via the secondary market.

Closing Thoughts

Sovereign Gold Bonds provide an excellent way to invest in gold without storing physical gold. There are tax benefits that make an investment in SGBs more profitable than investing in physical gold. Also, the interest payment over and above capital gains further adds a layer of security to balance the volatility in gold prices. Therefore, it is recommended that you invest a part of your portfolio in sovereign gold bonds to gain exposure to gold at a lower risk and higher returns than physical gold or jewellery.

Reference Link
https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=55856

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