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Article originally published in Gujarati Mid-day newspaper on July 13, 2021. Here is the transcript of the same.

India’s Gold Reserve is the ninth highest in the world. Gold has always been an attractive investment for centuries. The Government of India issues Sovereign Gold Bonds through RBI. A new issue of Sovereign Gold Bonds is open from 12th to 16th July. The per gram issue price is Rs. 4,807 with a discount of Rs 50 for online subscribers.

These bonds come with the dual benefit of potential appreciation in gold prices and a fixed interest of 2.5% per annum. The Bonds are issued in denominations of one gram of gold and in multiples thereof with the maturity of 8 years. Minimum investment in the Bond shall be one gram with a maximum limit of subscription of 4 kg for individuals per financial year.

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.

Interest is credited semi-annually to the bank account of the investor and the last interest is paid on maturity along with the principal. Interest on the Bonds is taxable as Income from Other Sources as per the provisions of the Income-tax Act, 1961. TDS is not applicable on the bond. It is the responsibility of the bondholder to comply with the tax laws.

Some Gold Glitters More - Sovereign Gold Bonds and its Taxation Decoded

There is no tax on the proceeds of the sovereign gold bond at the time of redemption on maturity at the end of 8 years. Premature withdrawal is also possible after five years. Part holdings can also be redeemed in multiples of one gm. The capital gains tax arising on Partial / Premature withdrawal is taxable as per the applicable capital gains on Gold.

Let us assume that Alok, Anita and Bina wanted to invest Rs. 10 lakhs in Gold in the year 2015. Alok purchased physical gold, Anita invested in Gold ETF and Bina invested in Sovereign Gold Bonds. The appreciation in gold prices for all the 3 people remains similar and for sake of simplicity let's assume that the value of all 3 investments will be Rs. 20 lakhs in 2023 (8 years from the purchase date as SGB matures after 8 yrs). However, Bina has already got an added advantage of interest income over the 8 years at 2.5% per annum of the invested amount i.e. aggregate Rs. 2 lakhs. She must pay tax on this interest income in the respective financial years as per her slab rate.

 

Now, let's take a look at the capital gains arising to all. Alok and Anita will earn a total profit of Rs.10 lakhs and will pay a capital gain tax of approximately Rs. 1.25 lakhs (@ 20% plus 4% cess) after indexation. Bina will not pay any tax on redemption as the redemption of Sovereign Gold Bond on maturity by an individual is exempt from tax. Bina thus got an additional income of Rs 2 lakhs and also saved tax of Rs. 1.25 lakhs by being a smart and informed investor.

The bonds held in Demat form can be traded in stock exchanges. If the Sovereign Gold Bonds are transferred before the date of Maturity, the tax will be applicable. If held for less than three years, short term capital gains are taxed at the tax slab of the subscriber. If held for three years or more, then capital gains are taxed as long-term capital gains at a rate of 20%, with benefits of indexation.

Question

I have purchased Sovereign Gold Bond from the stock exchange worth Rs 5 lakhs. The maturity of these bonds is in November 2023. How much tax would I have to pay on redemption?

 

Answer

Since the Sovereign Gold Bond will be redeemed by you on maturity, no tax will be payable by you on the same. The investment period or how you purchased the Sovereign Gold Bonds are not considered when providing the exemption. Hence, though you purchased the bonds from the stock exchange and were not the original investor you will still receive the redemption amount tax-free.


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Category Income Tax, Other Articles by - CA Nitesh Buddhadev 



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