Why in news?
The Union Budget 2026‑27 clarified that the capital gains tax exemption on Sovereign Gold Bonds (SGBs) will apply only to bonds purchased directly from the primary issue and held until maturity. Investors who buy SGBs on the secondary market or redeem them prematurely will now face capital gains tax, effective 1 April 2026.
Background
Sovereign Gold Bonds were introduced by the Government of India in 2015 to provide an alternative to holding physical gold. Issued by the Reserve Bank of India on behalf of the government, each bond represents one gram of gold. Investors earn a fixed interest rate and receive the value of gold at redemption.
Key features of SGBs
- Interest rate: SGBs pay a fixed interest of 2.5 percent per annum, credited semi‑annually to the investor’s bank account.
- Tenure and redemption: The bonds mature in 8 years, with an option for early redemption after the fifth year on interest‑payment dates. Investors may also sell them on stock exchanges.
- Denomination and limits: The minimum investment is one gram of gold, while individuals and Hindu Undivided Families can subscribe up to 4 kilograms per fiscal year; trusts and institutions can invest up to 20 kilograms.
- Pricing: Issue and redemption prices are based on the average closing price of 999‑purity gold over the previous three business days, as published by the India Bullion and Jewellers Association.
- Benefits: SGBs provide price transparency, eliminate storage costs and can be pledged as collateral for loans. Capital gains are tax‑exempt if the bond is held until maturity.
- Limitations: The fixed interest rate may be lower than returns from other investments; early redemption is restricted; interest income is taxable; and the investment is tied to gold price fluctuations.
New tax rules from April 2026
- Capital gains tax exemption on SGB redemption will apply only to investors who subscribed to the bond during its original issuance and held it until maturity. Those who buy SGBs in the secondary market will no longer enjoy tax‑free capital gains.
- Premature redemption of SGBs—whether purchased in the primary issue or secondary market—will also attract capital gains tax from 1 April 2026.
- The rule change applies uniformly across all SGB series, encouraging investors to hold the bonds to maturity.
Significance
- Clarifies tax treatment and may reduce speculation in the secondary market, ensuring that SGBs serve as a long‑term savings instrument rather than a short‑term trading product.
- Encourages investors to subscribe directly to new tranches, aiding the government in mobilising domestic savings towards productive use.
- Existing investors should evaluate whether to redeem before the new rules take effect or hold to maturity to retain tax benefits.
Source: TH
