The second issue of sovereign gold bonds (SGBs) for 2022-23 priced at Rs 5,197 per gram is open for subscription. SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash, and the bonds are redeemed in cash on maturity.
These bonds give investors a fixed 2.5 percent interest rate on their money in addition to the possible benefit of higher gold prices. Semi-annual interest payments are made.
So, if you are planning to invest in gold bonds, it is important that you understand how your gains and interest income from gold bonds will be taxed.
Understanding what are the tax implications on SGBs
The SGB has an eight-year tenor, with an option to redeem early after the fifth year on the date interest is due.
According to the provisions of the Income Tax Act of 1961, interest on SGBs is taxable. The capital gains that result from an individual's redemption of SGB are not subject to tax. The transfer of the SGB will result in long-term capital gains that are eligible for indexation benefits.
The tax implications of Sovereign Gold Bonds need to be understood at 3 levels.
The interest of 2.5 percent received by you on your gold bond holdings is entirely taxable in your hands at your peak rate of tax.
You will ultimately pay the maximum tax on your interest receivable if you are in the 30 percent tax bracket. You must disclose this income when filing returns and pay advance tax in accordance because there is no TDS applied to interest paid out.
Tax on capital gains
Sovereign Gold Bonds are redeemed at the end of 8 years. At the time of redemption, any capital gains will be completely tax-free. In order to increase the appeal of the tax bonds and entice more investors to switch from physical gold to non-physical gold, the government has provided this specific tax benefit.
However, there are other implications if you exit the gold bonds earlier than that. There are 2 ways to exit your bonds earlier.
First - You can use the early redemption window that opens at the end of 5 years where you can redeem your gold bonds.
Second - To sell your gold bonds in the secondary market. All gold bonds issued will list on the stock exchanges with a unique ISIN on completion of 6 months from the date of the issue. In both these cases, the capital gains will be taxable.
The normal taxation definition of short term capital gains tax (if less than 3 years) and long term capital gains tax (if more than 3 years) will be applicable.
In case of short term capital gains the highest rate of capital gains tax will be due. If long term capital gains is involved, the investor has the option of paying tax at a flat rate of 10 percent or at a rate of 20 percent after taking the advantage of indexation into account.
Those looking to subscribe to the SGBs in the current tranche can apply through banks, Stock Holding Corporation of India Limited (SHCIL), stock exchanges NSE and BSE, designated post offices or through agents.
Since gold bonds are offered in minimum denominations of 1 gram of gold, most middle-class investors can afford them. It gives them a good opportunity to participate in gold as an asset class to hedge their overall portfolio risk.
