Tax Implication On Sovereign Gold Bonds:
Sovereign Gold Bonds are issued by Reserve Bank on behalf of Government of India. SGB has fixed tenor of 8 years but has an option to exit prematurely after 5 years from the date of issuance. SGB is also traded at the Stock Exchange (NSE/BSE) so investors holding bonds in demat form can trade in secondary markets.
SGB investors are paid 2.5% interest semi annually on the initial investment value. SGB returns are linked to the 999 Purity Gold, when gold price increases, Bond price also get increased.
Taxation on Interest Payment:
Interest paid on Sovereign Gold Bonds are taxable as per Income Tax slab. Tax Deducted at Source (TDS) is not applicable on the interest payment. Interest amount is clubbed to the Income and taxed as per applicable tax slab. Bondholder has to comply with the income tax laws.
Taxation on Redemption at Maturity:
Capital Gains arising on redemption of SGB at maturity are exempted/Tax-free for individual bondholders. Indexation benefit on capital gains are given to institutions like Trust, Associations etc
Taxation on Premature Redemption:
If SGB is sold via stock exchange with in 3 years from the date of issuance, It is classified as short-term capital gains, returns from SGB is added to the Income and taxed as per applicable tax slab.
If SGB is sold via stock exchange after 3 years, It is classified as Long-term capital gains, returns are taxed at 10% without indexation or 20% with indexation benefit.
Early encashment / Redemption of SGB after 5 years from the date of issue is allowed with RBI, However attracts Long term capital gain tax of 10% without indexation and 20% with indexation.
Example:
Vishnu Invests Rs50000 in Sovereign Gold Bonds and Sanju Invests Rs50000 in Gold ETF
Lets say after 8 years, Both the redeeming the investment at 1,20,000
Vishnu earns additional 2.5% interest for 8 years (Rs10000) and Saves capital gain tax of 10% on the redemption amount.
Sanju's investment doesn't fetch any interest payments, so loses Rs10000 . Capital Gains of Rs70000 is also taxed at 10% loses Rs7000 on returns.
Post Tax Compounded Annual Growth Rate (CAGR) is better on Vishnu investment in Sovereign Gold Bond compared to Sanju's investment in Gold ETF.
SGB overtakes the Gold ETF and Physical Gold in returns.
By looking at the Tax benefits and Interest payments, Mentotax recommends readers to invest in Sovereign Gold Bonds and hold till maturity for greater returns.
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