What Tax Benefits Will You Get From Sovereign Gold Bonds?

Sovereign gold bonds, issued by the Indian government, are a unique way to take exposure in gold as an asset class.

The Indian government introduced gold bonds in 2015 to curb the demand for imported gold in the country. India’s love for gold is well known. An estimation suggests that Indian households hold over 1 trillion worth of gold in gold bars and jewelry. These gold bonds allow investors to invest in gold in the form of bonds rather than hoarding physical gold. The government issues these bonds when it needs funds to finance various developmental projects.

Sovereign gold bonds have a maturity period of eight years. After which, you can redeem it at a redemption price based on market value.  Moreover, these bonds also earn an interest of 2.5 percent, payable at maturity. So, are these gold bonds good for investment? And, what are the sovereign gold bond tax benefits that you can receive? Let’s evaluate these questions and see if you must add sovereign gold bonds in your portfolio.

Understanding The Sovereign Gold Bond Scheme

Sovereign gold bonds are an excellent option to invest in gold as an asset class. These are proposed as a superior alternative to investing in physical gold and allow investors to invest in a minimum of one gram of gold. Since gold price is less susceptible to market volatility, investors invest in gold as a haven when market volatility rises. Sovereign gold bond tax exemption allows investors to receive tax free returns on maturity, which makes it attractive to investors. Apart from the fact that the government backs SGBs, it also ensures purity and fair pricing. So, before you invest, let’s discuss gold bond tax benefits in detail.

Sovereign gold bonds offer tax-free returns after eight years. The redemption value is exempted from tax if the investor remains invested for the entire tenure.  In addition to that, SGBs also receive 2.5 percent interest every year, increasing your return from the investment.

Benefits of investing in sovereign gold bond

Sovereign gold bonds are an excellent way to take exposure in the asset class – financial advisors.

• Sovereign gold bonds substitute for investing in physical gold, generating a steady income at a 2.5% interest rate besides capital gain.

• The most significant part is the tax exemption. Sovereign gold bond tax benefits offer complete tax-free returns on the redemption value on maturity.

• However, it will attract capital gain tax if exited or sold before attaining maturity, which is eight years.

• Long term capital gain tax applies if investors exit the SGB after five years.

• Sovereign gold bonds carry government guarantees and hence, considered as one of the safest investments.

• The low-risk investment is added for portfolio diversification by investors with extensive exposure in stocks.

• Sovereign gold bonds offer effective hedging against market volatility and are less impacted when volatility rises.

Tax Implications Of Sovereign Gold Bonds

Gold bonds are a low-risk investment with an assured return. However, the 2.5 percent tax that you earn is entirely taxable at the peak rate. That is, if you belong to the 30 percent tax bracket,   you will end up paying 30 percent tax on received interest. Since no TDS is deducted, you will need to declare interest income on SGB while filing your income tax returns.

The most significant benefit of SGB is the tax exemption on redemption value.  However, the tax treatment isn’t so favourable if you exit the bond before maturity. You will be charged capital gain tax if you try to exit the bond before eight years.

There are two ways you can exit a gold bond.

You can exit a bond using the early redemption window that opens after five years. Secondly, you can sell these bonds in the secondary market. All gold bonds issued by the government get listed in the stock market against a unique ISIN number after six months of issuance. But in both cases, capital gain from the bond is taxed according to capital gain tax rates.

Capital Gain Tax

Income arising from the investment of capital assets is taxed as per capital gain tax rates. The short-term capital gain tax (STGC) applies to income arising from any investment of three years or less. Conversely, long-term capital gain tax (LTGC) levies to investments of more than three years’ tenure. Since the lock-in period for SGB is five years, if you redeem it using the early redemption window, you will need to pay LTGC at a flat rate of 10 percent or 20 percent after indexation.

If you sell gold bonds in the exchange within three years of purchase, short-term capital gain (STGC) will apply. The capital gain, if any, will be added to your gross income and taxed as per income tax rates.

Conclusion

Diversification is one of the best ways to reduce the risk exposure of an investment portfolio, and investors can diversify through mutual funds, ETFs, gold bonds, and more.

Sovereign gold bonds offer significant benefits like independent pricing, purity, safety, government assurance, and regular income. Besides, sovereign gold bond tax benefits make SGB investment more desirable to investors.

Sovereign gold bonds have emerged as an exciting investment option in the Indian market. With assured return and tax benefits, gold bonds are gaining steady popularity amid Indian investors. If you are planning to invest in SGBs,  understanding the tax implications will help you plan your financial goal better.