To shunt the load of physical gold purchases to non-physical gold purchases and reduce the import of gold, the government came up with a solution in the form of Sovereign Gold Bonds. These are government securities issued by the RBI, on behalf of the government. With the help of SGBs people can invest in gold in paper form without purchasing physical gold.
The maturity period of Sovereign Gold Bond is 8 years but the lock-in period is 5 years. After maturity, the investor gets the current value of gold and during these 8 years investor gets the fixed rate of interest on the investment. Once lock-in period of 5 years has been completed, one can redeemed prematurely these bonds. Today, in this article, we will discuss about the premature redemption of SGB. But before that know
Why you must invest in it?
- Unlike physical gold, investors get a fixed interest every year.
- There is no threat of theft and you won’t be needed to pay for locker.
- Bonds are kept in the books of RBI or are kept in demat form. Hence there is no risk of loss of scrip.
- The returns received by the customer after the completion of 8 years are completely tax free. Whereas, in case of physical gold one needs to pay Capital gains tax.
- Sovereign gold bonds can also be bought jointly. It can also be taken in the name of minor.
- Investor can also take a loan against Sovereign Gold Bond.
Tax on interest:
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Investors get a fixed interest every year on Sovereign Gold Bond (SGB). The rate of interest has been fixed at 2.5 per cent per annum. This interest is taxable under the Income Tax Act, 1961. Interest accrues to the investor on half yearly basis. Interest earned from gold bonds in a financial year is counted in the income of the taxpayer from other sources. Therefore, it is taxed on the basis of which income tax slab the taxpayer falls in. However, there is no TDS on the interest earned from gold bonds.
What if we redeem SGB prematurely?
The returns received by the customer after the maturity period of 8 years of the Sovereign Gold Bond is completely tax free. However, there are two ways of premature exit from Sovereign Gold Bond but doing so attracts different tax rates on bond returns.
- Redeeming from where you bought
Usually, the lock-in period of Sovereign Gold Bond is 5 years. The profits or returns from the sale of gold bonds after the lock-in period and before the maturity date are taxed as a long term capital gain. Long term capital gains tax rate is 20 per cent with added cess and indexation benefits.
In case of premature redemption, investors can approach the concerned bank/SHCIL offices/Post Office/agent thirty days before the coupon payment date. Request for premature redemption can only be entertained if the investor approaches the concerned bank/post office at least one day before the coupon payment date. The proceeds will be credited to the customer’s bank account provided at the time of applying for the bond.
- Trading on stock exchange:
If SGB is listed on the stock exchange, it can be traded on the exchange from the date notified by RBI. If the gold bond is sold within 3 years from the date of purchase, the return received will be treated as short term capital gains. This will be added to the annual income of the investor and taxed as per the applicable income tax slab. On the other hand, if the gold bond is sold after completion of 3 years from the date of purchase, the returns received will be treated as long term capital gains and taxed at the rate of 20 per cent with added cess and indexation benefits.