Sovereign Gold Bonds: An In-depth Analysis

Introduction

Sovereign Gold Bonds (SGBs) are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank of India on behalf of the Government of India.

Features of SGBs

SGBs offer a multitude of benefits:

• Denomination: The Bonds are denominated in multiples of gram(s) of gold with a basic unit of 1 gram.

• Tenor: The tenor of the Bond will be for a period of 8 years with an exit option from the 5th year to be exercised on the interest payment dates.

• Interest: The bond bears an interest at the rate of 2.50% (fixed rate) per annum on the nominal value. Interest will be credited semi-annually to the investor’s account and the last interest will be payable on maturity along with the principal.

• Investment Limit: Minimum permissible investment will be 1 gram of gold. The maximum limit of subscribed shall be 4 KG for individual, 4 Kg for HUF and 20 Kg for trusts and similar entities per fiscal (April-March).

• Redemption Price: The redemption price will be in Indian Rupees based on the simple average of closing price of gold of 999 purity of previous 3 business days from the repayment date published by the India Bullion and Jewelers Association Limited.

Taxability of SGBs

The tax implications of SGBs are as follows:

• Interest Income: SGB offers regular interest income to the investor. Currently, the rate of 2.5% p.a. is offered on a half-yearly frequency. As per Section 193 (iv) of Income Tax Act, 1961 no tax should be deducted on interest paid on government security. However, the interest income is chargeable tax as per the normal income tax slab applicable to each bondholder.

• Capital Gain: The treatment of capital gain/loss is as follows:

• Short Term Capital Gain (STCG): Any gain earned with a holding period of less than 3 years falls under the category of STCG. This is chargeable to income tax as per the normal income tax slab.

• Long Term Capital Gain (LTCG): Any gain earned with a holding period of more than 3 years is treated as long term. The long term capital gain is chargeable to tax at a flat rate of 10% in case indexation benefit is not opted for. In case the indexation benefit is availed by the taxpayer, the rate of income tax is 20%.

Relevant extracts of provisions of section 112 is reproduced as under-

“112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of,—

(a) in the case of an individual or a Hindu undivided family, being a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent ;

(b) in the case of a domestic company,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent;

(c) in the case of a non-resident (not being a company) or a foreign company,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on long-term capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty per cent; and

(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which the public are substantially interested, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48;

(d) in any other case of a resident,—

(i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent.

…..

Explanation.—[***]

Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities (other than a unit) or zero coupon bond, exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.”

• Exemption: As per Section 47 (viic) of Income Tax Act, any capital gain earned on redemption of these bonds is exempt for taxation to an individual. The exemption is available only to individual taxpayers and not to other categories like HUF, trusts, etc.

Relevant extracts of provisions of section 47 is reproduced as under-

“(viic) any transfer of Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015, by way of redemption, by an assessee being an individual;”

Meaning thereby that even in cases where the Bond is purchased from secondary market and the bondholder waits for maturity by way of redemption by RBI, the same shall still remain out of scope of transfer vide the aforementioned provision of Section 47, thus ensuring that taxes under the head of Capital Gains is not levied, irrespective of period of holding.

Maturity of SGBs

The maturity period of the sovereign gold bond is eight years. However, you can choose to exit the bond from the fifth year (only on interest payout dates). On the date of maturity, the maturity proceeds are credited to the bank account provided by the investor during the application process. The redemption price is based on the simple average of the closing price of gold of 999 purity of the previous three business days from the repayment date published by the India Bullion and Jewelers Association Limited.

Conclusion

Sovereign Gold Bonds are a safe, lucrative, and tax-efficient way of investing in gold. They offer a fixed interest rate and the convenience of not having to store physical gold. However, like all investments, it is important to understand the features, benefits, and tax implications before investing.