Sovereign Gold Bond issue: Why tax certainty matters for investors

Imagine a cricket Test match where the host prepares two pitches — a green top for fast bowlers and a dry track for spinners. Before the match, it announces that the green top will be used, and the visiting team selects its players accordingly. After the toss, the host switches to the dry track — the one prepared for itself. In cricket, this would be called unfair play. In taxation, it is called a retrospective change. That is what the Budget 2026 proposal does by removing the capital gains exemption on Sovereign Gold Bonds (SGBs) already bought. 

SGBs, introduced in 2015, are linked to the price of gold. Investors earn 2.5 per cent annual interest and receive the gold value on redemption. They may redeem the bonds in six-monthly windows after five years or at final maturity after eight years, and may also sell them on the stock exchange. “Any redemption” of an SGB by “an individual” is exempt from capital gains tax. 

Since 2015, investors have made decisions on this understanding. Both original subscribers and those who bought SGBs in the market believed that any redemption — whether early or at maturity — would not attract capital gains tax. Budget 2026 now restricts that benefit to original subscribers who hold the bonds until final maturity, including on bonds already purchased. 

Senior ministry officials have said that the exemption was always intended only for those who subscribed to SGBs at issue and held them until maturity. That claim must be tested against the law. The Explanatory Memorandum to the Finance Bill, 2016, stated that “any redemption of Sovereign Gold Bond under the scheme, by an individual shall not be treated as transfer and therefore shall be exempt from tax on capital gains”. The words used were “any redemption” — not “final redemption”. The law refers to “an individual” — not “an original subscriber”. These distinctions matter. The law was clear. The proposal now changes it for investments already made, challenging the certainty that investors expect from a tax administration. 

Early and final redemptions by original subscribers and secondary-market buyers have, so far, been accepted as exempt by the department. There are no known disputes or court challenges on this point. This proposal alters the settled position. 

Retrospective taxation has troubled India before. In the Vodafone case, a complex offshore structure was used in a large corporate sale, and the Supreme Court ruled that tax was not payable under the law at the time. The government later amended the law retrospectively. Many felt the tax demand was justified, but the retrospective change was criticised because it created uncertainty in the tax system. 

The SGB case is very different. There was no complex structuring to avoid tax, and the exemption follows directly from the words of the law. The present proposal is, therefore, not a clarification but a policy change applied retrospectively. 

Even if we set aside the principle of certainty, the practical gain from this retrospective change is small. When SGBs were issued, the government accepted the risk of rising gold prices. With gold now at around ₹15,500 per gram, the payout liability has increased by about ₹1.26 trillion. The tax exemption applies only to individuals, who hold a limited share of the bonds, and within them secondary-market buyers — the group affected by this proposal — are a much smaller minority. The extra tax that may be collected is unlikely to exceed a few hundred crores of rupees, making little difference to the burden while creating significant uncertainty. 

Truth be told, this proposal affects tax certainty. The government is free to change the law for the future. But changing the tax outcome of past investments weakens confidence in the stability of the system. The proposal should, therefore, be reconsidered and made prospective. The issue is not how much money is at stake, but the need for certainty in the law. Just as a host should not change the pitch after the toss, a tax system should not change the rules after investments are made. 

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor; X: @harshroongta