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How are Sovereign Gold Bonds taxed?
The interest income on Sovereign Gold Bonds are taxed at your slab rate.
The treatment of capital gains on Sovereign Gold Bonds is the same as for the physical gold.
If you sell Sovereign Gold bonds in the secondary markets before completion of 3 years (holding period), the resulting gains will be short term capital gains and taxed at your marginal tax rate.
If you sell Sovereign Gold bonds in the secondary markets after completion of 3 years (holding period), the resulting gains will be long term capital gains and taxed at 20% after indexation.
What about redemption?
Here, you have an interesting twist.
There is no capital gains tax on redemption (or maturity). Note this relief is only for individual investors (Section 47 of Income Tax Act).
Therefore, you may buy SBG at Rs 4,500 per gram and redeem with RBI after 8 years at Rs 6,500 per gram. You will NOT have to pay any capital gains tax. Remember, you can redeem SGB after 5 years on 6-month intervals too. There shall be no tax on such redemptions too.
This is to bring taxation of SGB in line with physical gold. In fact, makes it even better for SGBs. In case of physical gold, you can continue to hold as long as you want and thus not pay capital gains tax. However, sovereign gold bonds mature in 8 years. Taxing capital gains on redemption would have been a disincentive. Hence, this provision has been added.
When the SGB matures (or you redeem), you can use the proceeds to purchase another gold bond or physical gold/jewellery or use it for any purchase.
What are the pros and cons of investing in Sovereign Gold Bonds?
Before we get down to the pros and cons, let’s first look at other ways of investing in gold invest in gold and the associated issues. And how SGBs fare against them.
- Physical gold (Storage can be a problem but manageable. Purity)
- Gold Jewellery (Bad choice as an investment since you incur making charges)
- Gold Mutual Funds (Expense ratio. Wide variance in performance of gold mutual funds)
- Gold ETFs (Expense ratio, low liquidity, impact cost, Price and NAV difference)
None of the above forms of gold pays you interest income. Only Sovereign Gold Bonds do.
Unlike Gold mutual funds and gold ETFs, you do not have to incur any expenses. I checked the expense ratio was close to 1% for some funds and ETFs.
There is an additional benefit with Sovereign gold bonds. As I understand, all the above forms of gold will include the impact of 3% GST on buying gold. Remember, even gold mutual funds and ETFs must buy the underlying gold. With Sovereign Gold Bonds, since there is no underlying gold (we believe in Government’s promise to match the Gold price), there is no GST impact.
That’s for the good part.
Sovereign Gold Bonds are not without a problem. You may face issues if you must sell in the secondary market.
Liquidity is a problem in the secondary market. This may mean higher impact cost (difference between bid and ask spread). In the worst case, you may just not be able to sell or may have to sell at a heavy discount.
There are many reasons for lower liquidity in the secondary market. First, there are many SGB issues that are traded on the market. Therefore, the demand gets spread across many investments. Secondly, the RBI issues SGBs almost on a monthly basis. Hence, potential buyers can directly subscribe to the new issue than buy on the exchange (unless they can buy something on the exchange at high discount).
Earlier, there was an issue with inter-depository transfers (between CDSL and NSDL) too. Thus, most brokerage firms didn’t allow you to buy in the secondary market (though they are allowed to sell). As I understand, this is no longer a problem.
Whatever the reason be, the liquidity is low in most issues. Some issues hardly even trade. You can find information about the trading volumes on NSE website. As a seller, this information may not be as useful. You can sell only what you hold. However, as a potential buyer, you must consider this aspect. At the same time, keep an eye on actual gold price levels before you go and place a buy bid. Also, note that the SGBs have an interest component too. The difference is not just in interest rate (earlier the interest rate offered was 2.75% p.a. The interest you earn depends on the subscription price. Factor in these aspects while placing your bid. I have discussed such aspects in detail in the following post: