RBI announces early redemption for SGB: Tax implications explained

You can prematurely withdraw your sovereign gold bond investment once it completes the fifth year

The Reserve Bank of India (RBI) has announced an early redemption for Sovereign Gold Bonds (SGBs) issued between May 2017 and March 2020. The redemption process will take place in two phases, starting from October 11, 2024, and extending to March 1, 2025. 

Sovereign Gold Bonds have a maturity period of eight years, but investors have the option of premature redemption after 5, 6, and 7 years.

Premature redemption

Early redemption of SGBs gives flexibility and allows investors to access their funds if needed. However, it is crucial to consider the potential drawbacks of premature redemption, such as missing out on potential future gold price appreciation and the interest payments for the remaining years.

 

What will be the tax implications if SGB is held till maturity or redeemed prematurely?

Tax implications if you hold the bonds until the end of the complete tenure 

If you hold your sovereign gold bonds until maturity, there shall be no capital gains tax on gains on redemption, in case of individuals, due to the express exemption provided in the Income Tax Act. Therefore, the gains on redemption shall be tax free.

Tax implications of premature redemption 

The Income Tax Act provides for exemption to individuals on redemption/ maturity of the SGBs by the RBI, since they are not regarded as a transfer and hence not chargeable to capital gains tax. Therefore, premature redemption when done through RBI, within the designated time frames/ windows, does not attract capital gains tax in the hands of the individuals.

What will be the tax implications if you sell them in the market before maturity?

“If SGBs are sold in the secondary market before maturity, they will entail capital gains tax depending on their period of holding. As per the latest provisions, if they are held for more than 12 months, the capital gains shall be taxable as long-term, taxed at 12.5 per cent, without any indexation benefits. Otherwise, they shall be taxed as short-term capital gains at applicable slab rates,” said Ritika Nayyar, Partner, Singhania & Co.

Let us understand with help of example:

-- If you sell your SGBs after holding them for 10 months and make a profit of ~10,000, this gain will be taxed as short-term capital gains according to your applicable income tax slab rate.

 

-- However, if you sell your SGBs after holding them for 3 years and you have a gain of Rs 50,000, then such gain is taxable at 12.5 per cent without any indexation benefit.

 

“Whether gold bonds should be redeemed or not is a function of whether one wants to stay invested in addition to the equity market or not. Many hold good bonds as they would require gold at a future date on account of a wedding in the family. The gold bonds over the last few years have given returns between 12-14 per cent (inclusive of 2.50 per cent fixed rate of interest) in account of increase in gold prices. The advantage of holding gold bonds is that one need not hold gold physically and also eliminates the need to insure gold or anxiety of theft is also addressed,” said Diana Mathias, Partner at Cignas.