SGB 2023-24 (Series IV) opened for subscription recently. The new issue seems to have generated a lot of interest among individuals. However, many of them are not sure how income from investing in Sovereign Gold Bonds is taxed. This article aims to help such individuals.
Investments in Sovereign Gold Bond (SGB) matures after a period of eight years. Subscribers have the option to apply for premature redemption after the fifth year. This means if you invest today in SGB, you can make either a premature redemption after five years or full redemption after eight years. Alternatively, you may exit from your SGB investment via stock exchanges (NSE and BSE).
Tax on SGB arises on one occasion, i.e. on the annual interest. SGB investments earn 2.5% fixed interest per annum. And this income is fully taxable. However, capital gains realised on redemption of SGBs is fully tax-free.
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When does tax-free redemption apply?
No tax applies on redemption of SGBs after eight years. This facility is also available in case of early redemption after completion of 5 years from the date of investment.
Interestingly, tax exemption on income from SGB investment is available to original subscribers as well as those who buy from secondary market. To avail this benefit, you can redeem either after five years or after eight years.
Further, tax exemption on income from redemption of SGBs is for individuals only. This facility is not available to other entities allowed to invest in SGBs.
Tax on selling Sovereign Gold Bonds in secondary market
The taxation of income from selling SGB in secondary market is different from regular redemption.
In case you sell SGBs in secondary market and book profit then such income becomes fully taxable. This tax applies either as a short-term capital gain (STCG) or long-term capital gain (LTCG), depending on the holding period.
The LTCG tax will apply if you sell after holding SGBs for 12 month. For less than 12 months of holding, STCG will apply.
While calculating LTCG tax, you can claim indexation benefit also. Alternatively, you may pay a flat 10% of profit as tax if it is more beneficial than indexing. Exemption benefit under Section 54F for LTCG is also available in this case.
