InvestorQ : Are there any unique tax benefits that are available on these gold bonds issued by the RBI?
Chandralekha Desai made post

Are there any unique tax benefits that are available on these gold bonds issued by the RBI?

Dawn Cherian answered.
3 years ago

At the outset, the tax implications of Sovereign Gold Bonds need to be understood at 3 levels viz. at the time of receipt of interest, the redemption on completion of tenure and an early redemption…

Firstly, 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. But it is treated as normal income like your bank interest and is taxable in your hands.

What about capital gains when the bonds are held up to redemption? Sovereign Gold Bonds are redeemed at the end of completion of 8 years. Any capital gains arising at the time of redemption will be entirely tax-free. This point needs to be noted and this tax exemption is unique to the Sovereign Gold Bonds only. 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.

What if you decide to exit the gold bonds before the maturity through the secondary market listing? What would be the tax implication in that case? It needs to be noted that in the event of early redemption, the tax treatment is not so favourable if you exit the gold bonds earlier than the 8 year lock in period. 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 will have to pay tax at 20% but will get an additional benefit of indexation of cost of acquisition which will further reduce the capital gains on which tax is payable. It is because of these unique advantages that 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.