You can maximize your returns effectively by understanding their tax implications, as they are highly beneficial with tax benefits compared to other steady-growth investments.
Indians have long favored gold as an investment because of its stability in unpredictable markets. The cultural relevance of these investments in India has made them hugely successful. Moreover, gold investments are recognized as a form of protection against inflation and economic uncertainty.
Investors can invest in physical gold items such as jewelry or gold coins, gold exchange-traded funds, sovereign gold bonds, or gold mutual funds, which are more liquid and reasonable assets. However, due to its theft risk, physical gold includes storage and safety costs. Furthermore, the returns on gold are lower when acquired as jewelry due to manufacturing expenses.
As a result, the Indian government launched Sovereign Gold Bonds to mitigate these negative effects. They offer tax benefits on sovereign gold bonds along with exposure to gold. They remove all manufacturing and disposal expenses, resulting in better actual rates of return. For investors who are unwilling to take risks, these bonds may be an effective means of diversification.
Key Takeaways
- If SGBs are held till maturity, they attract zero capital gain tax.
- Interest from SGBs is considered “Income from Other Sources” and is taxable as per the respective tax slabs.
- If encashed within 36 months they attract short-term capital gains and are applied as per the respective tax slab
- If encashed after 36 months, but before maturity, they attract long-term capital gain tax which is 10% without indexation otherwise 20% with indexation.
- Early withdrawal is possible only after holding it for 5 years with applicable long-term capital gain tax.
- No storage costs and safety concerns are applicable here unlike the physical gold.
- The recent changes affect the long-term capital gain tax in ETFs, making SGBs more attractive
Why are people rushing to invest in gold?
Yes, people are allured more by gold for various reasons, including:
- At uncertain times, it serves as a safe investment option.
- Unlike any other currency, they believe it to have an intrinsic value that wouldn’t degrade, thus backing against inflation and deflation.
- Be it political or economic instability, gold is the one more invested during this time, as stocks and bonds can look like very risky assets while gold seems to maintain or increase in value.
- Its price value is independent of other assets, thus making an individual player in the portfolio, balancing it when others are falling.
- Central banks keep gold as a reserve and have consistently been the net buyers in recent years, which brings individual investors to trust in the asset.
What is a Sovereign Gold Bond?
In November 2015, the government introduced the sovereign gold bond scheme, which aims to lower the market demand for physical gold and turn some domestic funds that had been used to buy gold into monetary savings.
The selling price of a Sovereign Gold Bond is established by taking a simple average of the closing values of 999 purity gold over the previous three days, as set by the Indian Bullion and Jewellers Association Limited.
The Sovereign Gold Bond scheme offers an interest rate of 2.5% annually and pays out half-yearly to investors.
Sovereign Gold Bonds are government bonds that are valued in gold grams. The Reserve Bank of India (RBI) issues these bonds in the name of the government of India. Sovereign Gold Bonds are a safe, practical, and affordable investment choice since they let investors buy gold without requiring significant storage.
Sovereign Gold Bonds are available for purchase from specific banks, postal offices, and stock exchanges. They are issued in several portions over the course of the year. The RBI announces the bond price prior to each phase, which is based on the present market value of gold.
Sovereign Gold Bonds typically have an 8-year term, with a withdrawal option offered after the fifth year on interest payment dates, and they could be traded in secondary markets. There are several income tax benefits on sovereign gold bonds.
Analysis of the First tranche of Sovereign Gold Bond with respect to tax
The first issue of the SGB tranche was on November 30, 2015, and if you, as an investor, had invested during this time until 8 years of maturity, here’s what it looked like with returns and tax.
Issue price: Rs 2684 per gram of gold
Interest rate: 2.75%
Redemption price: 6,132 per gram of gold
No of units: 100 grams
Maturity period: November 30, 2023
The number of units invested is 100; 100 units = 100 grams
The investment amount during the issue is Rs 2,684 100 = Rs 2,68,400
The capital appreciation of investment during redemption is Rs 6,132 100 = Rs 6,13,200
| Particulars | Returns |
|---|---|
| Year 1 | 2,68,400 2.75% = 7,381 |
| Year 2 | 7,381 |
| Year 3 | 7,381 |
| Year 4 | 7,381 |
| Year 5 | 7,381 |
| Year 6 | 7,381 |
| Year 7 | 7,381 |
| Year 8 | 7,381 |
| Total Interest | 59,048 |
| Capital Appreciation | 6,13,200 - 2,68,400 = 3,44,800 |
| Total Gains | 3,44,800 + 59,048 = 4,03,848 |
| Capital Gain Tax held till 8 years | 0 |
| Interest Income Tax | As per the income tax slab, assuming a 20% slab rate for an income of 12.5 lahks, the total income, including interest income, is 12,50,000 + 59,048 = 13,09,048 Tax for 12,50,000 = 1,00,000 Tax for 13,09,048 = 1,11,809.60 Tax for interest income = 1,11,809.60 - 1,00,000 = 11,809.60 Which is 59,04820% = 11,809.60 |
| Total profit | 4,03,848 - 11,809.60 = 3,92,038.40 |
The profit after tax on the investment value of Rs 2,68,400 after 8 years is Rs 3,92,038.40
If you sell before three years, it attracts short term capital gain tax, which is considered income from other sources and added to your total income. Let’s see the returns after STCG.
Price of SGB in 2017 = Rs 2,934
Selling 100 units this time is 2934 100 =Rs 293400
The Capital Appreciation is 2,68,400 – 2,93,400 = Rs 25,000
| Particulars | Returns |
|---|---|
| Total Interest | Rs 59,048 |
| Capital Gains | Rs 25,000 |
| Total Gains | 59,048 + 25,000 = 84,048 |
| Capital Gain Tax | Taxed as per individual slab |
| Interest Income Tax | Taxed as per individual slab |
| Tax incurred | As per the income tax slab, assuming a 20% slab rate for an income of 12.5 lakh, the total income, including capital gains and interest income, is 12,50,000 + 84,048 = 13,34,048 Tax for 12,50,000 = 1,00,000 Tax for 13,34,048 = 1,16,809.60 Tax for capital gain and interest income included = 1,16,809.60 - 1,00,000 = 16,809.60 Which is 84,048 20% = 16,809.60 |
| Total Profit | 84,048 - 16,809.60 = 67,238.40. |
The profit after tax on the investment value of Rs 2,68,400 after 8 years is Rs 3,92,038.40
If you sell before three years, it attracts short term capital gain tax, which is considered income from other sources and added to your total income. Let’s see the returns after STCG.
Price of SGB in 2017 = Rs 2,934
Selling 100 units this time is 2934 100 =Rs 293400
The Capital Appreciation is 2,68,400 – 2,93,400 = Rs 25,000
| Particulars | Returns |
|---|---|
| Total Interest | Rs 59,048 |
| Capital Gains | Rs 25,000 |
| Total Gains | 59,048 + 25,000 = 84,048 |
| Capital Gain Tax | Taxed as per individual slab |
| Interest Income Tax | Taxed as per individual slab |
| Tax incurred | As per the income tax slab, assuming a 20% slab rate for an income of 12.5 lakh, the total income, including capital gains and interest income, is 12,50,000 + 84,048 = 13,34,048 Tax for 12,50,000 = 1,00,000 Tax for 13,34,048 = 1,16,809.60 Tax for capital gain and interest income included = 1,16,809.60 - 1,00,000 = 16,809.60 Which is 84,048 20% = 16,809.60 |
| Total Profit | 84,048 - 16,809.60 = 67,238.40. |
The profit after tax on the investment value of Rs 2,68,400 after 2 years is Rs 67,238.40
If you sell after three years, assuming you sell in your fifth year, it attracts long term capital gain tax, which is taxed at 10% or 20% with indexation.
Price of SGB in 2020= Rs 5,177
Selling 100 units this time is 5177 100 =Rs 5,17,700
The Capital Appreciation is 2,68,400 – 5,17,700 = 2,49,300
| Particulars | Returns |
|---|---|
| Total Interest | Rs 59,048 |
| Capital Gains | Rs 2,49,300 |
| Total Gains | 59,048 + 2,49,300 = 3,08,348 |
| Capital Gain Tax | 10% or 20% with indexation |
| Interest Income Tax | Taxed as per individual slab |
| Tax incurred on interest | As per income tax slab, assuming 20% slab rate for an income of 12.5 lakh, the total income, including capital gains and interest income, is 12,50,000 + 59,048 = 13,09,048 Tax for 12,50,000 = 1,00,000 Tax for 13,09,048 = 1,11,809.60 Tax for interest income = 1,11,809.60 - 1,00,000 = 11,809.60 Which is 59,048 20% =11,809.60 |
| Tax incurred on capital gain | 10% tax: 3,08,348 10% = 30,834.80 20% + indexation: For indexation benefit, CII (cost inflation index) is considered during the purchase and while selling. CII for the year of purchase (2015): 254 CII for the year of sale (2020): 301 Indexed purchase price = 2,684301254=3,180.54 The indexed purchase price for 100 grams = 3,18,054 Selling price = 5,17,700 Taxable gain = 5,17,700 - 3,18,054 = 1,99,646 Tax = 20% 1,99,646 = 39,929.20 If the selling price was less than the purchasing price, then there would be no capital gain tax. 10% (30,834.80) < 20% (39,929.20) Pick whichever is lower; in this case, it is 10% |
| Total Tax | For 10% = Interest Tax + Capital Gain Tax = 11,809.60 + 30,834.80 = 32,644.40 |
| Profit After Tax | 3,08,348 - 32,644.40 = 2,75,703.60 |
The profit after tax on the investment value of Rs 2,68,400 after 5 years is Rs 2,75,703.60
Comparatively, the profit after 8 years is greater than that after 5 years and 2 years for 100 grams of investment.
3,92,038.40 > 2,75,703.60 > 67,238.40
Sovereign Gold Bond Tax Implications
There are several income tax benefits to sovereign gold bonds under the tax regimes of these investments.
Sovereign Gold Bond Tax Implications on Interest Income
Investors of Sovereign Gold Bonds are entitled to interest payments at a rate of 2.5% per annum on their initially invested amount. Given that this kind of income is not excluded from tax under the terms of the IT Act, it must be taxed at the applicable slab rates under the heading “Income from Other Sources”.
Sovereign Gold Bond Tax Implications on Redemption on Maturity/Capital Gains Tax
Capital gains are profits earned as a result of an increase in the price of the underlying asset. According to Section 47(viic) of the IT Act, any redemption of Sovereign Gold Bonds that were issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015 by a person is not considered a “transfer.” Individual taxpayers will not be required to pay capital gains tax if they redeem their Sovereign Gold Bond investment at maturity.
Sovereign Gold Bond Tax Implications on Prior Sales of the Bonds: Short-Term Capital Gains Tax
Short-term capital gains tax will be applied to your gains if you trade the bond before 36 months have passed since your investment. The income tax slab that applies to your income will match the STCG that you are charged.
Sovereign Gold Bond Tax Implications on Prior Sales of the Bonds: Long-Term Capital Gains Tax
In the event that you trade the Sovereign Gold Bonds after 36 months, you will be subject to Long Term Capital Gains (LTCG) taxation. 10% is the LTCG on Sovereign Gold Bonds without indexation advantages, and 20% is the LTCG with indexation benefits. You have the option of choosing the lower one. With indexation, inflation related to the bond’s original cost is taken into consideration when calculating actual capital gains.
Sovereign Gold Bond vs Physical Gold vs Gold ETFs: Tax Implications
Since gold investments are one of the major investments in India, there are certain tax norms for different kinds of gold investments.
Sovereign Gold Bond Tax Implications
It will be considered an LTCG when you cash it within the first five years. The tax rate on LTCG from SGB is either 10% without indexation advantages or 20% with indexation advantages. The interest received on SGB is taxable as income from other sources and is not tax deductible.
Physical Gold Tax Implications
You may be subject to short-term capital gains tax when you sell gold and silver three years following the purchase or earlier than 36 months. The effective income tax slab rate determines how much is taxed on the STCGs.
One may be liable for long-term capital gains tax if they sell gold and silver after possessing them for a period exceeding three years or longer than 36 months. The LTCG tax on precious metals like gold and silver has the added benefit of indexation and is imposed at a set rate of 20% plus a 4% cess.
Gold ETFs Tax Implications
Gold ETFs and gold-savings funds acquired before and after March 31, 2023, are taxed differently, which affects how their capital gains are treated:
Pre 31st, 2023
Gold ETFs are managed and taxed in the same way as physical gold. If possessed for three years or longer, they become long-term capital assets. It will be subject to indexation advantages and a 20% tax rate. The taxes are paid at the time of redemption or sale.
Post 31st March 2023
Irrespective of the duration that you hold onto the gold ETFs, you will be taxed on short-term capital gains. The taxes are paid at the time of redemption or sale and are subject to slab rates of taxation.
Get Sovereign Gold Bond Income Tax Benefit with GoldenPi
Due to the major sovereign gold bond scheme income tax benefit, these bonds have been considered one of the most interesting investment options in India in recent years. When the investment is converted into cash, any capital gains will be fully tax-free. This is a unique tax benefit provided by the government that helps make gold bonds more appealing to attract greater numbers of investors to switch from physical to non-physical gold.
If you are an investor and want to diversify your portfolio, sovereign gold bonds prove to be a great investment choice. These bonds let you invest in gold with a small amount of investment. To get the listings of sovereign gold bonds, you can log in to GoldenPi and get the details about each sovereign gold bond.
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FAQs About Sovereign Gold Bond Tax Benefit
1.What are the tax implications of investing in Sovereign Gold Bonds?
It’s a tax-free capital gain in Sovereign Gold Bonds if held till maturity of 8 years. The earned interest rate is alone taxable as it is considered as the “Income from Other Sources” at the slab rates applicable to you.
2. How do we show SGB’s interest in ITR?
The interest received from SGB needs to be reported in the schedule under other sources in the ITR. Depending on the eligible criteria of an individual, it can be filed in either ITR 1, 2, 3 or 4.
3. Can NRIs invest in SGBs?
Sovereign Gold Bond investment isn’t allowed for NRIs but if you invested before the change in citizenship, it can be held till maturity and reap the benefits of the investment.
4. Can nominees claim the sovereign gold bond amount upon the investor’s death?
Yes, upon the death of the investor, the nominee can claim the SGB, as there is an option for adding the nominee details while investing in SGB, but S/he must be a resident of India. But in the event of the death of an investor, if the nominee is not an Indian citizen, they can just hold it until maturity. Still, they can’t transfer the maturity amount and interest to their own country.
5. Is Sovereign Gold Bond better than Gold ETF?
If you want to invest easily and maybe profit from short-term price alterations, go for gold exchange-traded funds (ETFs). SGBs are the best option if you value capital security, guaranteed returns, and tax advantages over instant liquidity.
6. What is the disadvantage of the gold ETF?
In periods of geopolitical unrest or economic uncertainty, gold ETFs would not perform quite as well as physical gold.
7. Which is better, a Sovereign Gold Bond or a Fixed Deposit?
Investing in SGBs offers protection against inflation, as compared to PPFs or FDs, which have experienced inflation over time.
8. Do gold ETFs hold physical gold?
Several gold exchange-traded funds (ETFs) make investments directly in physical gold bullion. The benefits of investing in a gold exchange-traded fund (ETF) backed by physical gold include access to gold assets without requiring you to hold any physical gold and the ability to invest small amounts of money. Furthermore, gold ETFs have higher liquidity than physical gold.
9. Is Sovereign Gold Bond tax-free after 5 years?
The Sovereign Gold Bond has an eight-year term, although investors can choose to cash out earlier than the interest payment date following the bond’s fifth year of issuance. After the five-year period, you can transfer or sell the bonds, under LTCG, the appropriate tax rate is 20%, plus cess, less the benefits of indexation. According to the rules of the IT Act of 1961, interest received on Sovereign Gold Bonds is taxable.
