Sovereign Gold Bond (SGB) : Tax Benefits

8 min read • Updated 14 September 2023
Written by Vaibhav Khandelwal

Gold has traditionally been a preferred means of Investment in India. It is seen as a stable instrument even in times of market distress. However, investing in physical gold has its own set of shortcomings. Storing gold securely comes at a cost, as it is prone to theft. Further, the returns on gold reduce when purchased in the form of jewellery due to making and wastage charges. Still, most of the Indian demand for gold is met through imports. Increasing demand for gold, therefore, leads to a widening trade deficit. This in turn has an adverse impact on the value of the Indian rupee.

Sovereign Gold Bonds were hence launched to counter these drawbacks. They offer exposure to gold while providing tax benefits. They eliminate any making and wastage charges leading to higher real rates of return. These bonds can be used as a diversification tool if you are a risk-averse investor. Continue reading to learn in detail about SGB tax benefits. 

What are Sovereign Gold Bonds?

Sovereign Gold Bonds are government securities whose value is denominated in multiples of grams of gold. They were launched to replace the dependence on physical gold. SGBs are issued by the RBI on behalf of the Government of India. They offer you exposure to gold for investment without having to hold physical gold. Some of the defining characteristics of a Sovereign Gold bond are: 

  • SGBs, like any other bonds, pay periodic interest. The interest rate paid on an SGB is 2.5% annually, paid twice a year. 
  • The tenure of the bond is 8 years. However, you can redeem the bond anytime after 5 years. You can also sell in the secondary market.
  • The bond can be purchased by Indian residents. The eligible person include:
    • Individuals
    • Trusts
    • Universities
    • HUFs
    • Charitable Institutions
  • In case the residential status changes from resident to a non-resident, the investor can continue to hold the SGB till maturity/early redemption.
  • You can invest in a minimum of an SGB worth 1 gram of gold, and a maximum of 4 Kg of gold if you are an individual investor or a Hindu Undivided Family. The maximum limit is 20 kg for trusts and other entities as specified by the government. 
  • You can buy and sell SGBs through banks, recognised stock exchanges or their agents or in secondary market
  • There are various tax benefits to the gains on SGBs, which are discussed in the next section

How are SGBs Taxed

The SGB taxation on capital gains can be categorised into:

SGB Taxation on Interest Income

The interest income from Sovereign Gold Bonds is taxable as per the provisions of the Income Tax Act, of 1961. The interest income is added to your total income, and the tax is charged on it as per your applicable tax slab.

SGB Taxation on Capital Gains

Capital gains refer to the gains you earn due to appreciation in the price of the underlying asset. For e.g., if you purchased gold at the price of ₹45,000 per 10 grams and now the price is ₹47,000/-, then your capital gains are ₹47000 – ₹45000 = ₹2000/-. 

There is an exemption from paying Capital Gains Tax in case you redeem the SGB with RBI (on behalf of government) 

In case of redemption before maturity:

Short-term Capital Gains Tax: 

If you sell the bond before the completion of 1 year after investment, your gains will be charged as short-term capital gains tax. The STCG charged to you will be the same as the income tax slab applicable to you as per your income (including the Short term capital gains)

Long-term Capital Gains Tax

If you sell the SGB after 1 year, you are taxed as per the Long Term Capital Gains(LTCG) tax. The LTCG on SGB is charged at a flat 10% without indexation benefits or 20% with indexation benefits. You can choose any one which is lower. Indexation means that the real capital gains are calculated after accounting for inflation in the purchased price of the bond. 

SGB Tax Benefits

As discussed above, there are various tax benefits to investing in SGBs:

  1. There is no TDS deducted or GST charged on the purchase or redemption of SGBs.
  2. The capital gains on redemption of the bonds at maturity are completely exempted from income tax.
  3. The long term capital gains before maturity, can be paid after availing the benefits of indexation.

Benefits of investing in SGB

The benefits of investing in a Sovereign Gold Bond are:

  1. You can invest in gold, without having to make arrangements for its secure storage. Risks such as theft and loss are eliminated when you invest in SGBs instead of physical gold.
  2. Further, you also save on wastage that is a part of moulding the gold into jewellery. There are no making charges involved if you invest in gold bonds. 
  3. You may not realise much capital gains on gold, but by investing in SGBs you receive an assured interest payment every 6 months.
  4. SGBs can be used as collateral to avail loans.
  5. You also have the option of premature redemption in case of an emergency or if you anticipate a price drop in future. Additionally you can sell in the secondary market as well.

Disadvantages of investing in SGB

Despite the many advantages, there are some disadvantages to investing in SGBs:

  1. Since the SGBs are valued in terms of the prices of gold, there is a possibility that the gold prices do not increase in line with the other market-linked instruments of investment. In such a scenario, your returns might be lower than expected. 
  2. The maturity period of 8 years could be too long for some investors seeking a shorter investment horizon. However, one call sells in the secondary market.
  3. You can buy SGBs only in tranches as declared by the RBI. However one can purchase via the secondary market.

Closing Thoughts

Sovereign Gold Bonds provide an excellent way to invest in gold without having to store physical gold. There are tax benefits that make an investment in SGBs more profitable than investing in physical gold. Also, the interest payment over and above capital gains, further adds a layer of security to balance the volatility in gold prices. Therefore, it is recommended that you invest a part of your portfolio in sovereign gold bonds to gain exposure to gold at a lower risk and higher returns as compared to physical gold or jewellery.

Reference Link

Frequently Asked Questions

Who issues SGBs?

Sovereign Gold Bonds are issued by the RBI on behalf of the Government of India.

Can a minor invest in Sovereign Gold Bonds?

Yes. A guardian can invest in SGB on behalf of a minor.

How is SGB investment better than buying physical gold?

If the purpose is investing, it is better to buy SGBs than physical gold. SGBs earn periodic interest over and above the capital gains from investing gold.

What are Gold ETFs?

Gold ETF is a securitised unit representing physical gold in Demat form. It is 100% backed by pure gold. Through ETFs, you can invest even in fractions of grams of gold. When you buy or sell gold ETFs, you actually pay or receive cash equivalents.

Can I redeem SGBs in physical gold?

No. When you redeem a Sovereign gold bond, you receive the cash equivalent of gold value at the time.

Are SGBs backed by gold?

No. SGBs are not backed by gold and are a part of the market borrowing programme of the government.

Is SGB 22 Carat or 24 carat?

A Sovereign Gold Bond is demarcated as 24-carat gold.

Do I need a Demat account to invest in SGBs?

No. It is not necessary to have a Demat account to invest in SGBs. However you will get ₹50 discount if you buy SGBs online.

Can we claim tax benefit on sovereign gold bond?

Yes, the capital gain you earn from from your SGB investment will be tax exempted if you hold it for 8 years. Moreover there is no TDS deducted or GST charged on the purchase or redemption of SGBs. But the interest earned on SGBs is taxed under ‘Income from other sources’.

Is SGB tax free if bought from secondary market?

Yes, if you hold the SGB till maturity it will be tax fee even if you have bought from the secondary market .

Can I save tax by investing in SGB?

Yes, if you hold SGBs till maturity, you wont have to pay capital gains tax on it. Additionally, SGBs are not considered wealth for the purpose of wealth tax.

What happens after 8 years of sovereign gold bond?

Redeem your SGB: You have the option to redeem your SGB at the market price, on the redemption date. The redemption price will be determined based on the closing prices of 999 purity gold as published by the India Bullion and Jewellers Association Limited (IBJA) during the three working days to the redemption date.
Extend the duration of your SGB: You have the opportunity to extend your SGB for a period of 8 years. The interest rate for this extended period will remain unchanged from that of the tenure.
You can also sell your SGB in the secondary market: You have the choice to sell your SGB to another investor in the market. The price of your SGB, in this market will fluctuate based on prevailing gold prices.

How to show SGB interest in ITR?

The interest earned on SGB will be taxed under ‘Income from other sources’.

Was this helpful?

Vaibhav Khandelwal

Credit Principal
Vaibhav is Chartered Accountant by profession, having experience of 4+ years in banking & finance sector. Since past one year associated with Wint Wealth as Credit Principal. Previously worked with Northern Arc Capital for 2 years in FI-Credit Team and AU Small Finance Bank for 1 year in LAP-Credit Team. learn more

Popular Articles

Sovereign Gold Bond 2023-24 (Series 2): Price, Benefits, Issue Dates
Sovereign Gold Bond 2023-24 (Series 2): Price, Benefits, Issue Dates
  • 11 min read
  • 15 June 2023
Banking Ombudsman Scheme: Here is how to file your complaint against your Bank
Banking Ombudsman Scheme: Here is how to file your complaint against your Bank
  • 7 min read
  • 28 February 2023
How to Check Mutual Fund Status with Folio Number
How to Check Mutual Fund Status with Folio Number?
  • 5 min read
  • 6 December 2022
All about Form 60 and Form 61 under IT Act
All about Form 60 and Form 61 under IT Act
  • 10 min read
  • 6 April 2023
how to deposit money in sukanya samriddhi account online
How to Deposit Money in Sukanya Samriddhi Account Online?
  • 5 min read
  • 30 October 2022

Recent Articles

Muthoot Finance NCD Public Issue Tranche II September 2023 Review
Muthoot Finance NCD Public Issue Tranche II September 2023 Review
  • 5 min read
  • 18 September 2023
NPCI Launches 4 New UPI features
NPCI Launches 4 New UPI features
  • 4 min read
  • 14 September 2023
Kosamattam Finance September 2023 NCD Public Issue Review
Kosamattam Finance September 2023 NCD Public Issue Review
  • 6 min read
  • 7 September 2023
Indiabulls Housing Finance September 2023 Public NCD Review
Indiabulls Housing Finance September 2023 Public NCD Review
  • 5 min read
  • 6 September 2023
CreditAccess Grameen August 2023 NCD Public Issue Review
CreditAccess Grameen August 2023 NCD Public Issue Review
  • 5 min read
  • 22 August 2023