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Taxation of sovereign gold bonds

Sovereign gold bonds are issued by the Reserve Bank of India on behalf of the Government of India. Let's see how these are taxed.

Taxation of sovereign gold bonds

Sovereign gold bonds (SGBs) provide an assured annual return of 2.5 per cent in the form of interest. This is paid semi-annually to the bondholder and credited directly into their bank account. For taxation purposes, the interest is added to the taxable income every year and taxed as per the slab in which the bondholder falls.

The price of an SGB is linked to the price of gold of 999 purity as published by the India Bullion and Jewellers Association. It is based on the average price during the last three days. The appreciation in its price (if any) is taxed as capital gains. Sovereign gold bonds have a tenure of eight years and can be redeemed pre-maturely only after five years.

While the capital gains on the maturity of the SGB are exempt from taxation, there is an anomaly about whether the realised gains are taxable if the bond is redeemed prematurely. As per the frequently asked questions (FAQs) on the website of RBI, realised gains on redemption of an SGB are tax-free. It is not mentioned specifically whether the exemption is available only when the SGB is redeemed on maturity, that is after completing its tenure of eight years, or if the exemption is also available on redeeming the bond prematurely after the lock-in period of five years. Though more clarity on it is still awaited, many experts prefer treating it as exempted from taxation provided the bond is redeemed and not just transferred.

Sovereign gold bonds are also traded on the stock exchange. And like any other listed bond, the gains are considered as short-term capital gains and added to the taxable income if they are sold within one year. They are then taxed as per the applicable slab of the seller. If the SGBs are sold after a year, the gains are taxed at 10 per cent.

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