Sovereign Gold Bond Tax-Exemption with Example – STCG | LTCG | TDS

Sovereign Gold Bond

In this article, we will discuss Sovereign Gold Bond Tax-Exemption in 2022-23. Before we discuss tax implications on SGBs, let’s understand in brief what is Sovereign gold bond. For more details, you can refer to the main article published on profitsolo.com

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Sovereign gold bond is government-backed securities denominated in grams of gold. These bonds are issued by RBI on behalf of the Govt of India. Provide a perfect substitute for physical gold which frees one from the heck of holding physical gold. It does provide a fixed return plus the market price of the gold on maturity.

I’m just reiterating the salient features of the SGB so to freshen up your memory:

• SGBs will be denominated in grams of gold and the multiples thereof. As an investor, a minimum subscription of 1gm is permissible and this can go up to 4kgs for individuals and HUFs, and 20kgs for trust and entities as notified by GOI in circulars.
• The investors will earn interest on the principal as notified by RBI for a particular tranche at the time of its launch and are payable semi-annually. In addition, the last interest plus the principal amount will be paid at maturity. Currently, the rate is 2.5% fixed.
• The maturity period for SGBs is 8 years and offers an exit option from the 5th year onwards that can be exercised on the interest payment dates.
• The redemption amount will be paid on the simple averages of the closing price of the last 3 business days in Indian Rupees from the date of repayment and as published by the India Bullion and Jewelers Association Limited.

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Sovereign Gold Bond Tax-Exemption

Now let’s discuss the Sovereign Gold Bond Tax-exemption and what benefits it offers from a tax perspective.

Well, SGB offers capital gain tax exemption benefits to its investors if they hold the bond till maturity. Capital gain refers to an appreciation of the asset value which can be realized on the sale of the asset. There are two types of capital gains short-term and long-term.

Short-term Capital Gain: Any gains earned on holding assets for more than 3 years or less will be considered as short-term capital gains. These gains will be taxable per the bondholder’s income tax slab.

Long-term Capital Gain: Refers to the gain earned over holding an asset for more than 3years. LTCG is chargeable at a flat rate of 10% in case indexation benefit is not opted or else 20% with indexation benefit. Indexation is a way by which income payments are adjusted against inflation to maintain the purchasing power of the individual.

On top of that TDS does not get deducted as per section 193(iv) of the income tax act, 1960 which states tax should not be deducted on the interest paid on government securities.
However, the interest on SGB is taxable as per the income slab the bondholders fall in.

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Let’s exemplify this for your understanding by taking varied scenarios:

There is a salaried investor named David whose annual income is 10lac. From the investment point of view, he purchased SGBs worth 1lac today.
As we know SGBs come with a fixed maturity of 8 years which is considered long-term from the capital gain aspect. Let’s study the probable scenario for David:

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Example

1. He holds the SGBs till maturity and receives semi-annual interest till 7.5 years at a rate of 2.5%.
   Answer: Capital gain will be exempted in this case as he holds till maturity. However, his annual income is 10lac so falls in the 20%  income tax slab. And the interest he earned semi-annually for 2.5% will come under income from other sources. He can claim a tax deduction of interest earned in the 80C limit if it’s not fully utilized to make these bonds completely tax-free. Or else he can pay 20% on the total interest earned in that assessment year.
   
2. After 5 years let’s say David needs money so he redeems the SGB.
   Answer: As 5-year tenure will be considered as long term and he broke this SBG before maturity so liable to pay capital gain tax at 20% with indexation benefit or at a flat rate of 10% without indexation benefit. Along with tax on interest, he received semi-annually if the 80C limit is fully utilized as per the tax slab.
   
3. Let’s say David sold off SGBs in the secondary market then what could be the tax implications.
   Answer: SGBs are tradeable and transferrable as per the Government securities Act,2006. In case he sells SGBs before three years then he is liable to pay only income tax on semi-annual interest until 3 years. Post 3 years he will be liable to pay long-term capital gain tax at 20% with indexation benefits.

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Sovereign Gold Bond Scheme 2022-23 Dates

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FAQs

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