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Tax Implications on Gold Bonds

12 Sep 2023

 India has long been a nation where people have been attracted to gold as an asset class. Indian households are estimated to be holding nearly $1 trillion worth of gold in the form of bars and jewellery. Over the last two years the government has introduced the Gold Bonds scheme which enables investors to hold gold in dematerialized form avoiding the hassles that are prevalent in physical gold. How do you go about buying gold bonds in India? Are there any specific sovereign gold bonds tax benefits? What are the other unique benefits that are available to investors in these Sovereign Gold Bonds. Above all, is the interest on gold bonds taxable or tax free? All these issues put together will help you understand the benefits of buying gold bonds in India from the perspective of returns, liquidity and tax benefits. Here is how.

Understanding the basics of the Sovereign Gold Bond Scheme.

The gold bonds are issued periodically by the RBI and are sold through the various banking channels as well as the post offices and other authorized agents. The gold bonds are denominated in grams of gold and the price of the gold bond issue is determined at the time of each tranche based on the average price. The price is normally fixed by the RBI slightly lower than the prevailing market price to make it attractive to the buyers. Additionally, the bonds are denominated in grams of gold so that the actual holding does not changing. What changes is the value of the gold bond holdings as that fluctuates with the market price of gold. Effectively, this is exactly like holding physical gold and participating in the price movement without the hassles of storage and conversion of form.

What makes the Sovereign Gold Bond Scheme attractive to investors

There are quite a few reasons why this Gold Bond Scheme is attractive to investors. Here are a few of them.

You can hold the bonds in the form of physical certificates or even in your existing demat account. This becomes a lot simpler than holding physical gold considering the risk of theft, storage risks and risks of form conversion.

The gold bonds pay an annual interest at the rate of 2.5%. This is an added kicker for gold bond investors. When you by gold you do not early any interest. In this case, you earn 2.5% interest each year plus you also get the benefit of gold price movement.

You can also buy these Sovereign Gold Bonds through your existing online trading account. Additionally, there is an extra discount of Rs.50 per gram available to you in case you buy gold bonds online and also pay digitally. That enhances your yield on these gold bonds.

Gold bonds can be held in multiple names. The limit of purchase of gold bods is 4 KG per year per person. So if you are 4 members in your family then your household can actually buy up to 16 KG of gold each year. The limit is 5 times that limit in case of trusts.

Since gold bonds are issued in minimum denominations of 1 gram of gold, then are within the reach of most middle-class investors too. It gives them a good opportunity to participate in gold as an asset class to hedge their overall portfolio risk.

Understanding Sovereign Gold Bonds tax benefits.

The tax implications of Sovereign Gold Bonds need to be understood at 3 levels.

The interest of 2.5% received by you on your gold bond holdings is entirely taxable in your hands at your peak rate of tax. So, the answer to your question; is interest on gold bonds taxable, is yes. If you are in the 30% tax bracket, then you will end up paying the peak tax on your interest receipt. Remember, there is no TDS on interest paid out and hence you need to show this income while filing returns and pay advance tax accordingly.

Let us now turn to the aspect of capital gains. Sovereign Gold Bonds are redeemed at the end of 8 years. Any capital gains arising at the time of redemption will be entirely tax-free. This is a special tax benefit that has been offered by the government to make the tax bonds more attractive and encourage more investors to shift from physical gold to non-physical gold.

However, the tax treatment is not so favourable if you exit the gold bonds earlier than that. There are 2 ways to exit your bonds earlier. Firstly, you can use the early redemption window that opens at the end of 5 years where you can redeem your gold bonds. The second option is to sell your gold bonds in the secondary market. All gold bonds issued will list on the stock exchanges with a unique ISIN on completion of 6 months from the date of the issue. In both these cases, the capital gains will be taxable. The normal taxation definition of STCG (if less than 3 years) and LTCG (if more than 3 years) will be applicable. The tax on capital gains will be payable at the peak rate in case of STCG. In case of LTCG, the investor can opt to pay tax at a flat rate of 10% or he can pay at 20% after considering the benefit of indexation.

SGBs have emerged as an interesting investment option in recent years. Buying gold bonds in India may finally be emerging as a lucrative investment option.


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