How to Sell SGBs? What are the tax implications?
Sovereign Gold Bonds (SGBs) cannot be sold in the primary market, but you can sell them in the secondary market. Here we’ll tell you how to sell SGBs and what will be their tax implications.
SGBs have gained popularity as an investment instrument in recent years, offering individuals a convenient and secure way to invest in gold. These bonds, issued by the Government of India, provide investors with the opportunity to earn fixed returns (2.5% interest on face value of bond), along with the benefit of capital appreciation based on the price of gold.
Also Read: Learn How to Buy Sovereign Gold Bond (SGB)
How Can You Sell SGBs?
When to sell SGBs?
The Sovereign Gold Bonds have a term period of 8 years. However, investor can pre-mature with RBI after the end of 5 years at interest payment dates.
Selling SGBs in the Secondary Market
SGBs can be traded in secondary markets such as NSE, and BSE. An investor can exit from their investment in SGBs via stock exchanges.
However, if an investor has held their SGB bonds in physical form, first they need to get it dematerialised to sell it over stock exchanges. Generally, SGBs are traded at discount in the secondary market due to low liquidity.
How to sell SGBs in the Secondary Market?
- In order to sell or redeem Sovereign Gold Bonds (SGBs) one-month advance notice will be given to the investor informing about the bonds maturity.
- On the date of maturity, the maturity proceeds will be credited to the bank account as per the details on record.
- In case of any changes in the provided bank account details such as the account number, phone number, email ID etc., the investor must inform the banks or the other selling agencies.
What will be the redemption price of SGBs?
The bonds will be redeemed in Indian rupees. The redemption price will be based on the simple average of the closing price of gold of 999 purity. The price will be the closing price of the 3 preceding days from the date of repayment as published by the India Bullion and Jewellers(IBJ) Association Limited.
Who are the Authorized sellers?
SGBs can be sold through the
- Authorised banks
- Designated post offices
- Stock Holding Corporation of India Limited (SHCIL)
- Clearing Corporation of India Limited (CCIL)
- Recognised stock exchanges like National Stock Exchange of India Limited and Bombay Stock Exchange Limited, either directly or through agents.
How are SGB income taxed?
Tax on Interest income of SGBs
The 2.5% interest income generated by SGBs is subject to taxation in accordance with the provisions outlined in the Income Tax Act of 1961. This interest income is added to your overall income and taxed at the rates determined by your specific tax slab.
SGB Capital Gains Tax
Capital gains are the profits derived from the increase in the value of an underlying asset. To illustrate, if you bought gold at ₹50,000 per 10 grams and the current price stands at ₹60,000, your capital gains would amount to ₹10,000.
It’s worth noting that when you redeem your SGBs at maturity, you are eligible for an exemption from paying Capital Gains Tax. But if you redeem SGBs are redeemed before their maturity, the taxation implications are as follows:
Short Term Capital Gains Tax
If you decide to sell the bond within one year of investment, any gains you make will be subject to Short Term Capital Gains (STCG) tax. The STCG tax rate applied will align with your income tax slab, taking into account your overall income, including the short-term capital gains.
Long Term Capital Gains Tax
Upon selling the SGB after holding it for a period exceeding one year, you will be subject to Long Term Capital Gains (LTCG) tax. The LTCG tax rate for SGBs stands at a flat 10% without the application of indexation benefits. Alternatively, you can choose the option of 20% LTCG tax with indexation benefits, selecting the lower tax amount between the two options. Indexation involves adjusting the purchase price of the bond to account for inflation, ensuring that the calculation of real capital gains considers the impact of inflation over time.
Indexation and Capital Gains Calculation
Indexation is a mechanism that accounts for inflation during the holding period of an investment. By adjusting the purchase price of the bonds based on the cost inflation index (CII), indexation allows investors to reduce their taxable capital gains, thereby reducing the tax burden.
To calculate the indexed cost of acquisition, one can use the following formula:
Indexed Cost of Acquisition = Cost of Acquisition x (CII of the year of transfer / CII of the year of acquisition)
Net Long-Term Capital Gains = Selling Price – Indexed Cost of Acquisition
Tax on Long-Term Capital Gains = Net Long-Term Capital Gains x 20%
Unlocking SGB Tax Benefits
This section will walk you through the sovereign gold bond tax benefits. Investing in SGBs offers the opportunity to diversify your investment portfolio with gold and provides several attractive tax benefits. Let’s delve into the advantageous tax provisions associated with SGBs:
- No TDS or GST: When purchasing or redeeming SGBs, there is no requirement for Tax Deducted at Source (TDS) deduction. Additionally, SGB transactions are exempt from Goods and Services Tax (GST), making it a tax-efficient investment option.
- Exemption on Capital Gains at Maturity: The capital gains realised upon redeeming SGBs at maturity are fully exempted from income tax. This means that the profits earned from the appreciation in the value of SGBs over the investment period do not attract any tax liability, providing investors with a significant tax advantage.
- Indexation Benefits on Long-Term Capital Gains: In the case of redeeming SGBs before maturity, long-term capital gains are applicable. However, investors have the option to utilise indexation benefits. Indexation allows for adjusting the purchase price of the bonds by accounting for inflation, thereby reducing the taxable capital gains. By availing indexation, investors can effectively reduce their tax liability and retain a higher portion of their gains.
By leveraging these tax benefits, investors can optimise their tax planning and enhance the overall returns on their investment in Sovereign Gold Bonds.
Note: It is important to consult with a tax advisor or financial expert to understand the specific tax implications and benefits based on your individual circumstances.
Frequently Asked Questions (FAQs)
How to buy SGB?
Investors can buy in the primary issuance conducted by the RBI (Reserve Bank of India) or the secondary market available on stock exchanges like the NSE (National Stock Exchange) and the BSE (Bombay Stock Exchange).
Is SGB tax free?
The 2.5% simple interest earned on the face value of SGB is taxable for investors. It gets added to your income and is taxed as per individual tax slabs. On the other hand, SGBs are also subject to capital gains tax if sold before maturity. However, if held till maturity, the gains are tax-free.
Is the taxation process different for buying SGBs in the secondary market compared to the primary market?
No, the taxation rules for purchasing SGBs (Sovereign Gold Bonds) in the secondary market are the same as those for buying them in the primary market. The tax treatment for capital gains and interest income remains consistent regardless of where the SGBs are acquired.
Why are SGBs traded at discounted rates in the secondary market?
SGBs have relatively lower trading volumes compared to other securities traded on stock exchanges. The lower liquidity in the secondary market can result in a lack of buyers or sellers, leading to a price difference between the market value of SGBs and the actual value of gold.