Tax Rules for Capital Gains on Sovereign Gold Bonds

Understanding capital gains tax rules for Sovereign Gold Bonds, tax benefits on maturity, early sale implications, and exemptions for short and long-term gains.
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06 January 2025
Sovereign Gold Bonds (SGBs) are a tax-efficient alternative to physical gold investments, offering capital appreciation alongside periodic interest income. The taxation on capital gains from SGBs depends on the holding period and the mode of redemption. If held until maturity (eight years), capital gains are entirely tax-free. However, premature redemption or secondary market sales attract capital gains tax, with different rates for short-term and long-term gains. Understanding the tax implications of SGB investments helps investors optimise their returns while minimising tax liabilities. This document provides detailed insights into capital gains taxation, reporting requirements, and the benefits of indexation on SGBs.

What is the capital gain on sovereign gold bonds?

Capital gain on Sovereign Gold Bonds (SGBs) arises when an investor sells the bonds at a price higher than the purchase cost. Since SGBs track gold prices, their value appreciates based on market trends. Capital gains can be realised in two ways—on redemption with the Reserve Bank of India (RBI) after maturity or through premature sale in the secondary market.

If held until maturity (eight years), the capital gains earned on redemption are completely tax-free. However, if sold before maturity, the gains are subject to capital gains tax. The tax treatment varies based on the holding period, with short-term capital gains taxed as per the investor’s income tax slab and long-term capital gains taxed at 20% with indexation benefits. The tax structure makes SGBs a more attractive investment compared to physical gold, which incurs capital gains tax regardless of the holding period.

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How is capital gain on SGBs taxed?

The taxation on capital gains from Sovereign Gold Bonds (SGBs) depends on the holding period and the mode of sale. If an investor holds SGBs until maturity (eight years), the capital gains from redemption are completely tax-free. This exemption makes SGBs a superior tax-efficient investment.

However, if the bonds are sold before maturity in the secondary market, capital gains tax is applicable. Short-term capital gains (if sold within three years) are taxed as per the investor’s income tax slab. Long-term capital gains (if held for more than three years) are taxed at 20% with indexation benefits. The indexation benefit lowers the taxable amount by adjusting the purchase price for inflation, reducing the overall tax liability. Investors selling before maturity should consider tax implications before exiting their investment.

Short term vs long term capital gains for sovereign gold bonds

The taxation of capital gains on Sovereign Gold Bonds (SGBs) depends on whether they are classified as short-term or long-term. This classification is based on the duration for which the bonds are held before being sold in the secondary market.

Short-term capital gains (STCG) occur when SGBs are sold before completing three years. These gains are added to the investor’s taxable income and taxed as per the applicable income tax slab. This can result in higher tax liability, especially for individuals in higher tax brackets.

Long-term capital gains (LTCG) apply when SGBs are sold after three years but before maturity. These gains attract a 20% tax rate with indexation benefits, which helps lower the taxable amount by adjusting for inflation. Holding SGBs for the full tenure of eight years eliminates capital gains tax upon redemption, making them an attractive long-term investment option.

Are capital gains from SGBs tax-free?

Capital gains from Sovereign Gold Bonds (SGBs) can be tax-free under specific conditions. If an investor holds SGBs until maturity (eight years) and redeems them with the Reserve Bank of India (RBI), the capital gains earned are completely exempt from taxation. This makes SGBs a tax-efficient investment compared to physical gold or gold ETFs.

However, if an investor sells SGBs in the secondary market before maturity, capital gains tax applies. Short-term gains (less than three years) are taxed as per the investor’s income tax slab, while long-term gains (more than three years) are taxed at 20% with indexation benefits. The complete tax exemption on maturity provides a significant advantage to long-term investors looking for a tax-free gold investment alternative.

Capital gains tax on premature sale of SGBs

Investors selling Sovereign Gold Bonds (SGBs) before maturity must pay capital gains tax based on the holding period.

  • Short-term gains: If Sovereign Gold Bonds (SGBs) are sold within three years of purchase, the capital gains are considered short-term. These gains are taxed based on the investor’s applicable income tax slab, which could result in higher tax liability depending on the individual’s income.
  • Long-term gains: For SGBs held for more than three years, the gains are classified as long-term. These gains attract a tax rate of 20% with indexation benefits, allowing investors to adjust the purchase price for inflation, which reduces the taxable amount.
  • Exemption on maturity: If the SGBs are held until maturity (eight years), the capital gains from redemption are completely exempt from tax, making this a highly attractive feature for long-term investors.
  • Impact on returns: Selling SGBs before maturity can diminish the tax advantages, as the full exemption on capital gains is lost, and tax on long-term or short-term gains may apply, reducing overall returns.

How to report capital gains from sovereign gold bonds?

Capital gains from Sovereign Gold Bonds (SGBs) must be reported in the Income Tax Return (ITR).

  • Identify the type of gain: The first step in reporting capital gains from Sovereign Gold Bonds (SGBs) is identifying whether the gains are short-term or long-term. Short-term capital gains (STCG) arise when the bonds are sold within three years of purchase, while long-term capital gains (LTCG) occur if the bonds are held for more than three years.
  • Choose the correct ITR form: Individuals with capital gains should use ITR-2. This form is specifically designed for taxpayers who have earned income from sources such as capital gains, including SGBs.
  • Provide sale details: In the capital gains section of the ITR, taxpayers must include essential details such as the purchase date, sale date, cost of acquisition, and sale price. This information is crucial for calculating the gains accurately.
  • Claim indexation benefits: For long-term capital gains, indexation benefits can be claimed to adjust the purchase cost for inflation, which helps lower taxable income. This reduces the overall tax liability, making SGBs a more tax-efficient investment.

SGB redemption and capital gains tax exemption

The sovereign gold bond scheme provides a significant tax advantage upon maturity. If an investor holds SGBs until the full tenure of eight years, the capital gains arising on redemption are entirely tax-free. This exemption makes SGBs a highly attractive investment for individuals looking for long-term gold exposure without tax liability.

However, if an investor exits the investment before maturity by selling in the secondary market, capital gains tax applies. Short-term gains (less than three years) are taxed as per the investor’s income tax slab, whereas long-term gains (beyond three years) attract 20% tax with indexation benefits. Investors should consider holding SGBs until maturity to maximise tax savings and enjoy full capital gains exemption.

Understanding indexation benefits for long-term capital gains on SGBs

Indexation benefits help investors reduce their tax liability on long-term capital gains from Sovereign Gold Bonds (SGBs). When SGBs are sold after three years but before maturity, the capital gains are subject to a 20% tax with indexation.

Indexation adjusts the purchase price of the bond for inflation using the Cost Inflation Index (CII), reducing the taxable capital gains. This benefit ensures that investors are not taxed on the inflationary increase in gold prices, lowering their overall tax burden. For instance, if an investor bought SGBs for Rs. 3,000 per gram and sells after five years when inflation-adjusted cost rises to Rs. 3,500, only the excess gain over Rs. 3,500 is taxed.

By leveraging indexation, SGB investors can significantly lower their taxable capital gains, making SGBs an attractive investment option with long-term tax benefits. However, if you need quick access to funds during this period, you can opt for a gold loan from Bajaj Finance, which allows you to leverage your gold assets without selling them, helping you meet urgent financial needs while retaining your investment.



Frequently asked questions

What is the capital gains tax if I sell SGBs before maturity?
If you sell Sovereign Gold Bonds (SGBs) before maturity, the capital gains tax depends on the holding period. For short-term gains (less than three years), the gains are taxed as per your income tax slab. For long-term gains (more than three years), the capital gains are taxed at 20% with indexation benefits. Indexation adjusts the purchase price of the bond for inflation, reducing the taxable amount. Selling before maturity may reduce the tax advantages of holding SGBs until maturity, which offers tax-free capital gains.

Is there a difference between short-term and long-term capital gains on SGBs?
Yes, short-term capital gains (STCG) occur if Sovereign Gold Bonds (SGBs) are sold before three years and are taxed as per the investor’s income tax slab. Long-term capital gains (LTCG) apply if sold after three years and are taxed at 20% with indexation benefits. Holding until maturity makes capital gains tax-free.

How to report SGB capital gains in ITR?
SGB capital gains should be reported under the ‘Capital Gains’ section in Income Tax Return (ITR-2). Short-term gains are taxed as per the income slab, while long-term gains attract 20% tax with indexation. Investors must provide details like purchase price, sale price, and holding period. Taxpayers should use the Cost Inflation Index (CII) for LTCG calculations.

Can I avoid capital gains tax on SGBs?
Yes, capital gains tax on Sovereign Gold Bonds (SGBs) can be avoided by holding them until maturity (eight years), as gains on redemption with the RBI are tax-free. However, selling before maturity in the secondary market incurs capital gains tax. Long-term gains benefit from indexation, reducing the tax burden on premature sale.

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