What are the Tax Benefits of SGB?

Sovereign Gold Bonds

India has for years and years been attracted to gold, and no one can say no to that. This Asset Class has somehow turned out to be the one part that hasn’t yet changed. Indian families and households are estimated to hold nearly a trillion dollars worth of gold in the form of bars or even jewellery. Over a few years, the government has established Gold Bond Schemes that enable investors to hold gold in a dematerialized form to avoid hassles that are involved with physical gold.

How to buy gold bonds in India? Is there a specific bond that has tax benefits? What are some other Perks of gold bonds? This is an answer to all of these questions. Firstly, let’s brush up on the basics.

What are Sovereign Gold Bonds?

Gold bonds are issued periodically by the Reserve Bank of India and sold through different banking channels and the post office. These bonds are denominated in gold grams and the price of the bond issued at the time. These prices are usually set by the RBI and are lower than the Market prices, this attracts more customers. The actual holding of them doesn’t change as they are denominated in grams of gold. The only thing that changes with these bonds is the value of hold and movement without hassles in terms of storage and conversion. 

Now that we know so much about them, it will only be right to identify if it is the best choice for you and should you be investing in an SGB.

Who can Invest in a Sovereign Gold Bond?

Here are eligibility mentions for sovereign gold bonds 2022, and it could make you an eligible applicant to start off your investment journey now.

Criteria for Eligibility

Any resident of Indian can invest in SGB which includes individuals, trusts, HUFs, charitable institutions, and colleges. An investment in SGB can also be made on behalf of a minor.

Denomination/Value

The bonds’ worth is measured in multiples of gram(s) of gold, with 1 gram serving as the base unit. The minimum initial investment is one gram of gold, with a maximum of four kilograms of gold per investor (individual and HUF). 20 kg of gold is authorized for entities such as trusts and universities.

Tenure

The sovereign gold bond has an eight-year maturity period. You can, however, choose to exit the bond after the fifth year (only on interest payout dates).

Rate

On your original investment, the current interest rate for SGB is 2.50% per year. It is only paid tow times a year (semi-annually). Typically, returns are related to the current market price of gold.

Bonds are issued

In India, only Reserve Bank of India holds the right to issue SGBs on behalf of the Central Government, and they are traded on the Stock Exchange. Available in multiples of one gram of gold, it’s issued to the investors in the form of a Holding Certificate. Investors can also convert it to Demat form.

Documentation for KYC

You must adhere to the same Know-your-customer (KYC) standards, as when purchasing real gold. KYC must be completed by sending copies of identity proof, such as a PAN Card, and address proof, such as a passport, driver’s license, or voter ID card, for verification.

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Given all of this and how it works and who is eligible, let us go to the most important aspect of these bonds, their tax. 

How are SGBs taxed?

You can understand the tax on Sovereign Gold Bonds through three detailed levels:- are you ready for them? 

Level 1

The interest on your gold bond is entirely taxable in your hands at the pinnacle rate of tax. Here is the answer to your question – is interest on holdings bonds taxed? It is a big yes. If you are in the 30% tax bracket, then you will be at the end of paying a peak tax on the interest receipt. Also, keep in mind that there is no TDS on interest paid out, so you would have to show this income while you file the returns and pay advance tax.

Level 2

Let us now look at the issue of capital gains. After 8 years, Sovereign Gold Bonds are redeemed. Any capital gains realized at the time of redemption will be tax-free. This is a specific tax benefit provided by the government in order to make tax bonds more appealing and encourage more investors to switch from physical gold to non-physical gold.

Level 3

If you exit the gold bonds before that date, the tax treatment is less beneficial. There are two ways to get out of your bindings sooner. To begin, you can take advantage of the early redemption window, which opens at the end of five years and allows you to redeem your gold bonds.

The secondary market is the second option for selling your gold bonds. Capital gains will be taxable in each of these circumstances. The standard taxation definitions of STCG (if less than three years) and LTCG (if more than three years) will apply.

In the case of STCG, capital gains tax will be levied at the maximum rate. In the case of LTCG, the investor can choose to pay tax at a flat rate of 10% or at a rate of 20% after factoring in the advantage of indexation.

Conclusion

In recent years, SGBs have emerged as an intriguing investment choice. Purchasing gold bonds in India may be emerging as a profitable investment option. So, what is the wait for? Buy one and expand your portfolio.

(This article is written by Groww – an online investment platform)

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